Bear Market

What is a bear market?Basically, a it is a stock market that has recently trended down. This typically happens over six months to a multiple year period.

They occur because there are economic indicators suggesting a weakening economy and people begin to sell their investments. As the indicators become more clear that profit growth is declining and as more people sell and drive prices down others panic and increase the selling. This is a downward spiral that will eventually bottom.

It ends when a trend upward occurs over a significant amount of time. This usually occurs before companies have recovered.

Can the beginning and end be reliably predicted?

No! Absolutely not! I cannot emphasize this enough. Many, many people will try to predict the beginning and ends of bear and bull markets. Most will fail. However, there always be a few that get lucky and guess right. Don't let that fool you. No one has consistently predicted when these periods will begin and end.

Getting lucky and guessing right is bound to happen when you have so many people guessing. If you take 1,000 people and have them all flip a coin 10 times, there are bound to be a handful of people that flipped all heads. The same principle applies to guessing the future activity of the stock market.

Also, don't be fooled when someone shows historical data that seems to predict exactly when things will turn one way or the other. There is so much data out there that is not hard to find patterns in the past. Just because there was a pattern in the past, doesn't mean the pattern will continue in the future.

What should I do when one arrives?

During a bear market, many people bail out of the stock market. This is a huge mistake because they are basically selling low when they should be buying more if they truly believe in the long-term prospects of the company or companies they invested in.

At the very least, the most prudent path is to continue your investing plan as if nothing has changed. If any change is to be made, increasing your investments is a change to make because everything is on sale! If the price of orange juice dropped by 50%, would you be more or less inclined buy it?

Follow the sage advice of: "Be fearful when others are greedy and greedy when others are fearful."

How will I know when its over?

Typically people don't know that a bear market has ended until about six months to a year afterwards. This is significantly after you can take advantage of its ending because most of the market recovery has already happened.

This is usually when the people who sold out the bottom jump back in thinking that the market is now "safe." Nothing could be further from the truth. in fact, the higher the market goes the less safe it is in the lower goes the more safe it is. For example, let's say you can buy a lottery ticket for one cent or for $10 with the potential payout being the same. Which one do you think is riskier?

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