When the stock market takes a nose dive or begins a long downward spiral, stock investors become concerned about their shrinking wealth.
The reality of investing in the stock market is that prices will go up and prices will go down.
When the market is trending up, stock investors may pat themselves on the back for their investing wisdom, however, when prices reverse (as they always will), unprepared stock investors may wonder what happened and why.
Smart investors play a defensive game when it comes to stock prices. They understand that the market will be up and down. Unfortunately, many investors focus on how to make big gains when the market is rising only to see those gains and more be lost when there is a market selloff.
The first step in defending your investments is understanding down or bear markets. This series of articles will help you understand the nature of the stock market to be up and down. They will also help you understand some of the basics of stock market cycles.
Bear markets are a part of investing in stocks. We don’t know precisely when the next one is coming, but it is almost certain that it will happen.
A bear market is defined as a 20 percent or more drop in the market (as measured by the major indexes) for a sustained period.
For some investors in the stock market, it is important to be accurate about describing whatever the market is doing at in particular time. For example, if the market (as defined by the S&P 500 Index) has been moving steadily up for a sustained period, they want to call it a bull market.
Big market drops get everyone’s attention, but stock investors who have been in the game for a while know these plunges are not the end of the world, but a natural part of market cycles.
Although it is somewhat over-simplified, the market’s cycle is to expand (prices rise) for a period during which there are small retreats, but mostly an upward slope until sellers return to the market.
Bet on the middle. Stock investors can help themselves if they count on extremes always swinging back to the middle. What this means is that, like politics, the extremes in market and economic cycles get most of the attention.
This attention can be easily confused with importance.
Don’t change your mix of stocks and bonds just because the market is acting crazy. The mix of stocks and bonds should reflect where you are in terms of your retirement and how much risk you are willing to take.
When the stock market is going through one of its periodic roller-coaster imitations, you may be tempted to make radical changes in your holdings to avoid possible losses or attempt to pick up a fast profit on a rapidly rising market.