Investment Markets Laid Bear
Hi everyone,
Are we in a bear market? Since the definition of a bear market seems to vary vastly the answer is debatable. A bear market is usually a lengthy downturn in share prices where there are more sellers than buyers and pessimists have the upper hand over optimists. The usual figure attached to a bear market is fall of more than 20% from a previous high.
So if you follow the usual time frame applied to these things it would appear that we are in a correction rather than a bear market. However given the global economic outlook it appears that there aren’t too many optimists willing to stick their heads above the parapet. What you need to remember though is that equity bear markets tend to be ridden with anxiety, disorderly, unplanned and outside the control of one person or any group of people.
Why Do Bear Markets Happen?
There can be lots of reasons…
The economic fundamentals are unrealistic. Companies are over valued and at some point people realise this. A sustained bear market tends to be caused by, (and in turn causes) economic downturn. This is because share prices are determined by corporate earnings and companies only make earnings by selling goods or services. People only spend money on goods and services if they feel confident about the economy. As you can see this tends to be a circular process that works both ways.
Corporate Debt. It is a general trend for companies to increase their borrowings. This is partly because it is cheaper to do this than issuing new shares. In the current credit crunch it is obviously more difficult and more expensive to take on new debt or refinance existing debts. This can also lead to a crisis of investor confidence which then impacts on share prices.
Political Events. Political events can often have a detrimental effect on the markets. Oil embargos, wars and domestic political instability have all in the past contributed to bear markets.
What should you do?
Although I covered this to a certain extent a few weeks ago in another article I do enjoy finding new ways to say the same thing. In market downturns it is the first instinct of many investors to abandon ship, rushing out of the stock market in exchange for the welcoming arms of bonds or cash. However these may often perform below inflation meaning that you may in effect lose money whilst diminishing your buying power (to get back in) when the markets do recover.
Some of my clients tend to analyse their investments on a weekly or even daily basis when there is a bear market even though they have invested initially for the long term. This can lead to trouble because markets may be distort badly over the short term as performance (good and bad) is itself exaggerated.
During expansions your expectations can soar too high; in recessions your fears are over emphasised. It’s human nature to react emotionally during times like this and over examining your stocks on a daily basis when stocks seem to be plummeting all around may influence you into moving out of perfectly good shares which then recover later quite naturally over the long term… and in fact could have gone on to make good profit for you.
Trying to second guess market swings is classic investor behaviour during bear markets. Ensuring you have proper asset allocation targeted for the long term combined with good quality stock by portfolio re-balancing is a wiser approach… and far less stressful. Aiming for a long term return of between 8 and 10 per-cent will ensure your investment vehicle will have done the job it set out to do, and you get to sleep soundly at night too.
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