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BEAR MARKETS ARE A RECURRING PART OF THE INVESTING CYCLE—YOU MUST BE PREPARED TO DEAL WITH THEM
May 03,2007 00:00
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Future bear markets will arrive like clockwork, every three to four years, on average. Avoiding these slumps is the key to protecting your hard-earned capital. Unfortunately, most investors have no clue as to the market’s future direction, how the stock market really works, or how to minimize their losses. Therefore, it is not surprising that investors suffer the consequences when a bear market sneaks up and mauls them. From 1950 to 1999, there were over a dozen bear markets, with the average one lasting 397 days, resulting in a loss in value of 30.9 percent. The average recovery period to reach the previous high was about 622 days (1.75 years) based on the S&P 500 Index.1 Assuming the last bear market ended on October 9, 2002 the S&P 500 Index dropped 49.1 percent drop from its top on March 24, 2000 to its bottom on October 9, 2002 which lasted 941 days. Similarly, from the market top in 2000 to the bottom on October 9, 2002, the Dow Jones Industrial Average dropped 37.8 percent (the actual top was January 14, 2000), , and the Nasdaq Composite Index cratered a whopping 77.9 percent. There will definitely be future bear markets, and if we are in a secular (long-term) bear market, then this current bear market may not have ended in 2002. Therefore, the key to investing is to preserve your capital at all costs. That means you should take prudent actions to avoid bear markets and not be invested in stocks when they occur. If you do not exit the market to protect your hardearned money, then your profits (if there are any) and even your principal will quickly shrink. How much can you lose in the next bear market? The crash of 1929 wiped out 86 percent of the value of investors’ portfolios, and the investors required 25.2 years to break even (not counting dividend reinvestment). Since then, there have been 19 bear markets, with an average loss of 33 percent, which took an average of 3.5 years to regain those losses. Not only are bear markets deadly financially, they can and do inflict significant emotional harm as well. Intelligent investors know that bear markets are inevitable, and therefore you should either step aside, into cash or, depending on your level of risk tolerance, you should short the market using mutual funds that are specialized for investing in bear markets or exchange-traded funds. The experts tell you that no one can time the markets with consistency. Guess what? The experts are wrong again, as you shall see. This book will provide you with the information you need so that you don’t have to guess or make an investing decision based on emotion or someone else’s opinion of where the market is headed. In late July 2002, Lawrence Kudlow, co-host of the Kudlow & Cramer show on CNBC, jokingly said that he and co-host Jim Cramer had called the 2001–2002 bear market bottom seven times, and that they will eventually get it right! But this is no joke. You can’t afford to depend on someone else’s guesses. You need to make your own investment decisions which you can do if you stick with the time-tested indicators and strategies which you will learn about in this site. |