BULL AND BEAR MARKETS

May 03,2007 00:00 by admin
BULL AND BEAR MARKETS
Looking back, individuals participated in a great bull run, if they
were fully invested since 1982 or even since the end of 1990, or even
since the beginning of 1995. From October 11, 1990 until January 14,
2000, the DJIA rose a cumulative 396 percent. From 1995 through
1999, the S&P 500 Index rose at a 28 percent annual compounded rate.
In 1999 alone, the Nasdaq Composite Index jumped an astonishing
85.6 percent. That was its largest yearly increase since the index was
created in 1971. Investors should have been extremely cautious in
2000, after such a huge unprecedented run-up, but they were net buyers
of stock rather than net sellers right at the market top because of
the unabashed euphoria and the bullish “gurus.”
Unfortunately, bear markets arrive every three to five years
(four years on average), and they can demolish your capital. It can
then take years to get back to breakeven, assuming you have the stomach to hold at the bottom. Don’t forget that a 50 percent loss in
a stock or mutual funds requires a 100 percent gain, just to break
even. And in the case of a 75 percent loss, a 300 percent gain is
needed to break even. To recover from this magnitude of loss takes
years. Most studies have shown that investors buy at market tops
and sell at the bottom—just the opposite of what they should be
doing. Since investing is ruled by emotions, this situation will
always occur. Fear and greed are factors that are at play when
humans are involved, and this fact will never change.