Investing: Learning to live with the bear

Last week the Standard & Poor’s 500 Index officially entered bear market territory, said Kathleen Pender in the San Francisco Chronicle. It closed more than 20 percent below its previous peak—in October 2007—thus matching the criteria most economists use to define the term. “By this measure, the Dow Jones Industrial Average entered the bear’s jaws on July 2 and the Nasdaq composite index got mauled in February.” Historically, bear markets in the S&P 500 have, on average, lasted 19 months and experienced a 34 percent decline. Considering that the market peak was just nine months ago, it seems “this one has a ways to go.”

Don’t be so sure, said Alexandra Twin in CNNmoney.com. Bear markets’ declines rarely stop at the 20-percent threshold, but nowadays they don’t last as long as they used to. “In the majority of bear markets, going back to the 1950s, stocks on average rose soundly during the one, two, three, six, and 12 months after the markets were first labeled as bears.” In 1980, 1987, and 1990, the S&P 500 was up by at least 20 percent just six months after the market bottomed out. That history is why some on Wall Street are welcoming the bear with open arms, said Katie Townshend, chief market technician at MKM Partners. “It’s often when the market feels so terrible that that’s when the best opportunities arise,” Townshend said.

Not every investor is getting the same mauling as the overall stock market, said Paul Lim in The New York Times. “Old-fashioned diversification has demonstrated its value.” According to research firm Morningstar, a portfolio of 70 percent stocks and 30 percent bonds would have fallen just 9 percent since the market’s October 2007 peak. Another strategy that proves valuable during bear markets is dollar-cost averaging—continuing to invest in stocks and bonds as they get cheaper. It takes discipline to put money into a tumbling market. But investors who hold the course in bad times set themselves up to “bask” in better returns when the market turns around.

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