How to Keep a Bear Market in Perspective

I would like to share with you to following headlines:

The Dow Jones Industrial Average is down 175 points…
The Nasdaq is down 2 ½ %...
Oil prices are up $25 per gallon…
Employment rates highest level in 5 years…
Real estate values are declining…

Do those headlines sound familiar? Don’t those headlines read like they were from the newspapers of last week? However, I forget to mention that these are from actual publications from the 1970’s.

Yes, bear markets can be scary; bear markets can cause sleepless nights; bear markets can strain your budget; bear markets can put a strain on your personal relationships.
However, the best thing to keep on mind during a bear market is we have seen them before and we will see them again. Remember, everything that goes up must come down and visa verse. Basically, during a bear market, the stock markets are realigning and readjusting to the valuations after a bull market.

What many investors fear is not simply the decline of their portfolio, but the unknown of where the bottom is. How far will the bear take us? Stock market psychologists refer to this as “ursaphobia” The term “ursa” is Latin for bear. The definition of a phobia is “to fear something”. Put them together and you get Ursaphobia – The Fear of the Bear.
Bear markets can scare not only novice investors but veteran traders, too. What exactly is the definition of a bear market?

A bear market is defined a period of widespread pessimism and falling security prices. Both of these can contribute to negative sentiment and can be self-sustaining. As a rule of thumb, a decline of 20% or more in the broad market indexes is considered the beginning of bear market. The broad market indexes include the Standard and Poor’s 500 (S&P 500), Dow Jones Industrial Average (DJIA), Nasdaq (NASD), etc. In addition, this decline must be over at least a 2 month period.
However, one thing to keep in mind is
a market correction is different than a bear market. A market correction is a short-term price decline, usually less than two months.

One of the earliest bull market and crash was “tulipmania” in Amsterdam the 1630’s. During this time, well-educated investors and the general public alike were so excited in tulip bulbs that livestock, houses and even tracts of land were used to purchase them. Such value was placed upon these rare and valuable bulbs that all common sense was removed from the marketplace. Prices often doubled within days with no apparent end in sight. However, as the market ran its course, as all bull markets do, the tulips lost their value and soon “tulipmania” ended. This crash left behind countless investors holding portfolios of worthless tulip bulbs. Fortunately, the bull markets of today aren’t in tulip bulbs, but this goes to show that fact the history in the financial markets do repeat themselves.

One of the best things to do after you open your next statement from your broker is to sit back and take a deep breath and remember we have been here before. The stock and the economy will recover and you need to position your portfolio to take advantage of the coming rebound and recovery.