Don't fear a bear market

With a turbulent start to the year in global stock markets, there has been a lot of talk about bear markets, which can make investors feel uneasy. When investors see stock prices begin to fall, they can be tempted to limit their losses by selling. But this can be just the opposite of what should be done. In fact, as a long-term investor, the difference between success and failure may be determined by your actions during a stock market decline. A bear market is called that because it is analogous to a bear's attack - in which the animal rears up on its hind legs and swipes its paws downward. According to survivalist Peter Kummerfeldt, if you come face to face with a real bear, it's essential to stay calm and keep a cool head. He says you should not panic or make sudden moves. Instead, you should stand your ground and never try to outrun a bear because injuries that occur have mostly to do with how the human resists. You might find that advice helpful in an investing context as well. While you'll probably never encounter a real bear in the woods, long-term investors can expect bear markets with almost total certainty. A bear market is a sharp and prolonged stock market decline - usually 20 per cent or more - and is almost always triggered by unexpected events or economic conditions. Bear markets are normal, happen frequently, and are not a reason to sell quality investments. Consider what happened in 2002. On October 9 of that year, the TSX Composite closed at 5695, its bear-market low. The U.S. Dow Jones Industrial Average bear-market low was 7286 on the same day. In both countries, these lows were followed by one of the longest market rallies in stock market history. It underscores the fact that in bear markets, investors may find that sage advice is to keep a cool head, a steady hand and to ignore extreme predictions of doom and gloom. If talk of a bear market has you thinking about selling quality stock and bond investments or changing strategies, you might want to reflect on the notion that time in the market is more important than timing the market. Although past performance is not an indication of future results, high-quality stock-market investments have proven to perform well over the long term. But investors who try to predict when to get in and out of the stock market can pay a severe penalty for not being fully invested when the market is rising. Missing the best 30 days between 1976 and 2007 would have reduced the annual gain from an investment in the TSX from 8.8 per cent to just 4.8 per cent. Many also will argue that if you had missed just a handful of the worst days, returns would have been better. This is true, but predicting the worst days can be even more difficult than predicting the best ones. And many times the best days follow worst ones. Either way, you're trying to time the market, and it's almost impossible to do that consistently. Instead of trying, you might find that staying invested throughout market ups and downs is a better way to help achieve your long-term goals. It's a discussion that's well worth having with your financial advisor. Edward Jones, Member CIPF.

 

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