When the Dow Jones industrial average, the Standard & Poor's 500, and other Wall Street indices sagged several days in a row recently, many investors started to wonder whether a bear market had finally settled in.
But an analyst with Edward D. Jones & Co. advises, "Don't fear the bear" and gives some pointers on "keeping a cool head when a bear market comes out of hibernation."For starters, Alan Skrainka notes, it isn't really a bear market until stock prices decline 15 percent. That happened 14 times from 1953 to 1990, and the stock market declined an average of 24 percent in periods lasting an average of eight months. It took seven months, on average, for the market to recover 75 percent of the lost value, and 13 months, on average, to recover 100 percent.
"Long-term investors should have a time horizon of decades, not months," Skrainka said in a recent advisory.
One problem, according to Srainka, is that investors too often "abandon common sense and succumb to irrational selling." In his view, the public overreacts to media coverage of Wall Street - including terms such as "plummet," "plunge," and "nose-dive" to describe the market's movements.
In reality, he says, "hibernating bear markets are almost always awakened by unpredictable events." For example:
- "In 1962, the stock market fell 30 percent after President Kennedy attacked steel companies for raising prices."
- "In 1973-74, the averages dropped 50 percent when inflation rose from 3 percent to 11 percent in just two years."
- "In 1990, the market slid 20 percent when Saddam Hussein invaded Kuwait."
Bear markets, which tend to end abruptly, "can present a tremendous buying opportunity for long-term investors," he maintains. Good stocks should not be sold in a market correction, he warns.
"The truly great stocks like Coca-Cola, Johnson & Johnson, and McDonald's, whose valuations almost always appear rich, suddenly present investors with a rare opportunity to buy their stock at bargain prices. These high quality stocks are often among the first to recover ... . Selling high-quality stocks in a market correction is almost always a mistake."
If an investor does wish to sell, "bear markets also give individuals the opportunity to sell weaker performers or to readjust the mix of stocks in a portfolio. This new cash can be used to buy higher-quality companies."
Use a bear market to strengthen portfolios, he advises. "Bear markets are the long-term investor's best friend."