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Bear Market Returns! Are You Prepared?© Sound Mind Investing | August 2008
A recent Barron's cover article featured interviews with leading market analysts. The majority were pessimistic, offering such assessments as "The market will be down this year, and next year won't be much better. It could be worse." And "So far, stocks are down 20%. The market will get killed when companies admit the second-half rebound isn't going to happen." The few optimists demonstrated little conviction, as in "Originally I thought the market would be flat to up 5%. It will probably close up." It seems we're at the point where the overwhelming sentiment is that we find ourselves in quite a mess. Among the many negatives confronting the market are the daily headlines announcing financial institutions in trouble, automaker losses and cutbacks, airlines losing billions due to high fuel costs, continued drops in housing prices and the rising number of foreclosures, a swooning U.S. dollar, and growing inflation and the toll it's taking on the average family. The bears are betting all this will lead to further declines of 10%-20% from current levels. The bulls are betting that all of these concerns are exaggerated, and are standing by their "Buy now!" recommendations. I hope that you're not betting at all. That you're dealing with market risk by being diversified. And that you're willing to be patient. The market will do what it has always done — go up, go down . . . and then go up again. The logarithmic graph below gives you the big picture of how stock prices, as measured by the S&P 500 index, have moved over the past 45 years. (A logarithmic graph of market behavior shows price changes in percentage terms rather than dollar terms.)  The graph shows the seven times prices have declined 20% or more, including the recent October-July selloff. But tell the truth — it really doesn't look all that bad, does it? It shouldn't. The market is still more than 50% higher than at its last bear-market bottom. If the current bear market lasts the average span of time, then we won't see the end of the decline until near the end of the year. I'm not saying that's what's going to happen, but if it does, are you prepared? Prepared to take advantage of it, that is. First, are you prepared financially? If you haven't been investing with borrowed money, then you can survive any bear market. You just maintain your strategy and wait it out. But that's looking at it negatively. Lower stock prices are bad only for people who have to sell. They offer temporary bargain prices for people who have the money to buy. Will you be in a position to systematically add to your holdings, or to initiate that dollar-cost-averaging strategy you've been thinking about? Second, are you prepared psychologically — that is, do you have a positive mental attitude? Yes, short-term we may have problems. But the long range outlook is positive, especially with the technological revolution still powering ahead. Years from now, stock prices will be far higher than they are now. It is only through the down phase of market cycles that we are given the opportunity to buy at low prices so we can sell later at high prices. Properly prepared for, bear markets are more of an advantage than a disadvantage. You need to embrace the mindset that a bear market in stocks is an opportunity, not a threat. (For more on why this should be the case, see Deja Vu, All Over Again?.) The stock market has few set rules. There are, however, certain truisms that have withstood the test of time. One is that bad market periods are always followed, in time, by good market periods. You're happy to take advantage of seasonal half-price sales at the local mall, aren't you? You should have the same "opportunity is knocking" attitude about stock prices when they "go on sale." Investment success, for the most part, comes from developing a practical, personalized strategy that focuses on quality investments, and then having the wisdom to wait for the markets to do what they have always done in the past — reward the patient investor. 
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