The bear isn't all bad. What exactly is a bear market?

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The Looming Bear

by Douglas Gerlach

Market headlines of recent days are using words that seem tailored to strike panic in the hearts of investors: fear, suffering, carnage.

Starting with the technology stocks of the Nasdaq, and now spreading even to the blue chip stalwarts of the Dow, this market sell-off is bringing us into territory that smells distinctively bear-ish. After enjoying years of great market news, it's unfamiliar territory for many of us.

But as Peter Lynch likes to point out, "When it's 15 below in Minnesota, they don't panic -- they just wait until spring." The market has gone up and down throughout its history, and it doesn't pay to panic when the market declines.

What exactly is a bear market? It's an extended period when stock prices generally decline. It can last for months, or even for years. A bull market is a period when stock prices generally increase. These terms originated back in the 1800s, but no one really knows how or why they came into use, nor why the bull came to symbolize periods of increasing prices while the bear represents downturns.

When you look at the market from a statistical perspective, you can see that it's very common for the market to experience some serious downturns. From 1928 through 1997, the S&P 500 declined in 20 of those 72 years. In eight of those years, it declined greater than 10 percent, and greater than 20 percent in four of the years. And that's not even counting the times that the market has declined greater than 10 percent or even 20 percent in the middle of a year and then recovered!

On the other hand, the S&P 500 has ended the year higher than it started out in 52 of 72 years. In 41 years, the S&P 500 ended up greater than 10 percent, and in 28 years, it closed the year with a 20 percent or greater gain.

But a bear market isn't all bad news. Sure, it can hurt when your portfolio takes a hit when stock prices fall. But you'd still better be prepared for the inevitable downturns in the stock market, and remember that the situation is only temporary, after all. In every instance when the overall market dropped, it returned and then grew to greater heights. In fact, the stock market has a 100 percent success rate when it comes to recovering from a bear market! The only thing to remember is that sometimes it takes longer for the bounce-back to occur.

If you follow a long-term approach to investing, then you know that patience is a virtue whenever you're investing in the stock market. It also helps to keep your vision focused on your long-term horizon whenever the market hits some turbulence. By using dollar cost averaging and by investing regularly, you can even make the bear market work for you by taking advantage of generally lower prices with additional purchases. Knowing the market's infallible past record, you can sleep easy -- even when other investors are panicking.