What to Do in a Down (Bear) Market?

What to Do in a Down (Bear) Market?https://myinvestingnotes.blogspot.com/2010/03/what-to-do-in-bear-market.html

Here is a summary of the provided post and a critical discussion on what to do in a bear market.

The post outlines three primary courses of action for investors during a declining (bear) market.

Key Points:

• Core Premise: Intelligent investors know how to act in both bull and bear markets.

• Suggested Strategies:

  1. Sell Immediately: The first option is to sell holdings quickly to minimize potential further losses.

  2. Take No Action: The second option is to do nothing and wait for the market to recover on its own.

  3. Buy More: The third option is to purchase more shares at lower prices, effectively "buying the dip."

• Important Caveat: The post advises that investors should only choose the third option (buying more) if the stock's decline is not due to a fundamental, company-specific problem.

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This post on navigating a bear market provides a basic starting point but, like the previous one on bull markets, requires significant expansion and critical analysis to be truly useful.

Expansion and Critical Discussion

The original post correctly identifies the emotional and financial stress of a bear market and presents three broad reactions. However, it oversimplifies the situation and, in one case, offers advice that could be detrimental.

1. On the Proposed Strategies:

• "Sell immediately in order to minimize your losses."

  • Expansion: This is known as capitulation or panic-selling. The logic is to preserve remaining capital before prices fall further.

  • Critical Discussion: This is often the most dangerous and counter-productive strategy for the average long-term investor. Selling after a decline turns a "paper loss" into a realized loss, locking in the decline and eliminating any chance of recovery. The greatest risk is mistaking a normal market cycle for a permanent failure. Historically, markets have always recovered from bear markets, and those who sold at the bottom missed the subsequent rebound. This strategy should not be a default option but a last resort for a specific, dire reason (e.g., the investor needs the cash immediately or the company is facing bankruptcy).

• "Let the market work its way through the problem with no action from your side."

  • Expansion: This is the "Buy and Hold" strategy applied to a downturn. It requires emotional fortitude to ride out the volatility, trusting in the long-term trend of the market.

  • Critical Discussion: This is a fundamentally sound strategy for well-diversified, long-term investors. However, it is psychologically challenging. The criticism is that it can be a passive excuse for inaction when a more active and beneficial strategy exists. Simply holding on while your portfolio drops 30-40% tests the resolve of even seasoned investors.

• "Benefit from the stock decline and add some more to your portfolio."

  • Expansion: This is the principle of "Buying the Dip" or Dollar-Cost Averaging (DCA). By investing at lower prices, you reduce your average share cost. The post's caveat about ensuring there's nothing fundamentally wrong with the company is crucial.

  • Critical Discussion: This is the most powerful strategy for wealth-building during a bear market, but it requires capital and courage. The post's caveat is correct but needs expansion. You must differentiate between:

    • Cyclical Downturn: A solid company's stock is down because the entire market or its sector is down (e.g., a recession). This is a potential buying opportunity.

    • Structural/Company-Specific Downturn: The company has a broken business model, crippling debt, or faces existential threats (e.g., new technology makes its product obsolete). This is a value trap, and buying more is throwing good money after bad.

2. Critical Analysis of the Core Argument and Omissions:

The post frames the bear market as a problem to be reacted to, but it misses the proactive mindset required for successful investing.

• What's Missing from the Discussion:

  1. The Importance of a Plan and Asset Allocation: An intelligent investor doesn't decide what to do during the panic. They have a plan before it happens. This includes having an appropriate asset allocation (mix of stocks and bonds). In a bear market, bonds typically hold their value better, providing stability and dry powder to rebalance.

  2. Rebalancing: This is a critical, disciplined strategy omitted from the post. If your target allocation is 60% stocks and 40% bonds, a bear market might shift it to 50%/50%. To rebalance, you would sell some of your bonds (which have held their value) and use the proceeds to buy more stocks at their new, lower prices. This forces you to "buy low and sell high" systematically and without emotion.

  3. Quality Over Everything: A bear market reveals the true quality of companies. It's a time to conduct deep fundamental analysis. Is the company's balance sheet strong? Does it have a durable competitive advantage? Is it generating cash flow? Focusing on quality is more important than ever.

  4. Tax-Loss Harvesting: A sophisticated strategy not mentioned is selling a security at a loss to realize that loss for tax purposes, then immediately buying a similar (but not identical) security to maintain market exposure. This turns a market negative into a tax positive.

  5. The Danger of "Catching a Falling Knife": The post doesn't warn that trying to "buy the dip" too early can be painful. Markets can fall much further and for longer than expected. A better approach than trying to time the bottom is dollar-cost averaging—investing fixed amounts at regular intervals to smooth out your purchase price.

Summary

The original post provides a basic, three-option framework for a bear market: sell (minimize losses), hold (do nothing), or buy (average down). It correctly identifies buying more as a potential opportunity, with the important caveat to ensure the company itself is not fundamentally broken.

However, the post has significant limitations:

• It presents selling immediately as a valid, neutral option without sufficiently highlighting its extreme risks for long-term investors.

• It promotes a reactive stance rather than a proactive strategy based on a pre-defined plan and asset allocation.

• It omits crucial concepts like portfolio rebalancing, tax-loss harvesting, and the disciplined use of dollar-cost averaging.

• It fails to emphasize that a bear market, while painful, is a normal part of the market cycle and a potential opportunity for long-term investors to acquire quality assets at a discount.

In conclusion, while the post identifies the basic choices, a more intelligent approach involves having a plan that includes a suitable asset allocation, the discipline to rebalance, and the courage to view a bear market not just as a threat to be endured, but as a sale on quality assets for those who are prepared. The goal is not to time the market, but to use time in the market to your advantage.

What to Do in a Up (Bull) Market?

 

What to Do in a Up (Bull) Market?

https://myinvestingnotes.blogspot.com/2010/03/what-to-do-in-up-bull-market.html

Here is a summary, followed by a critical discussion of the above post:

The post outlines a cautious approach for investors during a bull market, framing the rising prices as a potential risk that requires action to "counteract the potentially negative effects."

Key Points:

• Core Dilemma: While a bull market increases stock prices and provides profit opportunities, it is always followed by a correction that can rapidly erase gains.

• Suggested Strategies:

  1. Sell a portion of shares with the plan to buy back after the price falls.

  2. Do nothing and let the market correct itself.

  3. Sell entirely to realize profits.

• Recommended Strategy: The post specifically advocates for selling a portion of stocks at high bull-market prices. After the inevitable correction occurs, the investor should use the proceeds to buy back more shares at a lower price.

• Claimed Benefits: This approach is said to help avoid losses, increase the total number of shares owned, and reduce the average cost per share.

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A critical discussion of the above post.

This post touches on core investment principles but also contains some common misconceptions. Let's expand, critically discuss, and then summarize the original post.

Expansion and Critical Discussion

The original post correctly identifies the opportunity and the central dilemma of a bull market: how to realize gains without missing out on further potential upside. The proposed strategies, however, need deeper context and a critical eye.

1. On the Proposed Strategies:

• "Sell a part of the shares to repurchase later at a lower price."

  • Expansion: This is known as "Taking Profits" or "Rebalancing." It's a disciplined way to lock in gains. The advanced version mentioned later—using the proceeds to buy more after a correction—is a form of "Buy Low, Sell High" in action.

  • Critical Discussion: The major flaw here is timing risk. A "bull market" is not a single peak; it's a sustained upward trend with many peaks and valleys. What if you sell 20% of your shares, but the market continues to rally for another two years? You have now missed out on significant gains on that portion of your capital. This strategy can lead to opportunity cost and is essentially a form of market timing, which is notoriously difficult even for professionals.

• "Leave the market work its way through with no action."

  • Expansion: This is the classic "Buy and Hold" strategy. The underlying philosophy is that over the long term, quality assets tend to appreciate, and trying to time the market is a fool's errand. For investors with a long-time horizon (10+ years), this is often the most successful and least stressful approach.

  • Critical Discussion: The criticism is psychological and financial. Watching a 40% gain evaporate to a 10% gain in a sharp correction can be devastating and may cause an investor to panic-sell at the bottom. For those nearing retirement, failing to take some profits in a sustained bull market can be a catastrophic error, as they may not have the time to recover from the subsequent bear market.

• "Take advantage of the high prices and sell the stocks for a profit."

  • Expansion: This implies a full exit, which is different from selling a portion. This is a valid strategy if you believe the asset is severely overvalued or your investment thesis has changed.

  • Critical Discussion: The same timing risk applies, but even more severely. A full exit means you are 100% in cash. If the bull run continues, you are completely on the sidelines. Furthermore, selling triggers capital gains taxes, which can significantly eat into your returns, especially on short-term holdings.

2. Critical Analysis of the Core Argument:

The post frames a bull market as a problem to be "counteracted." This is a defensive, almost fearful, perspective. While prudence is key, a bull market is primarily an opportunity for wealth creation.

• The "Average Cost" Fallacy: The post claims that buying back after a correction will "reduce your average cost per share." This is misleading.

  • Example: You buy 10 shares at $10 each. The stock rises to $20, and you sell 5 shares. You now have 5 shares and $100 cash. The stock then crashes to $5. You use the $100 to buy 20 more shares. You now hold 25 shares with a total investment of $100 (for the first 10) = $100. Your new average cost is $200 / 25 shares = $8 per share. Yes, your cost basis is lower, but you achieved this by realizing a gain and deploying more capital at a lower price. The benefit came from the successful trade, not just the mathematical averaging.

• What's Missing from the Discussion:

  1. The Role of Valuation: The best action in a bull market depends on valuation. Is the market (or your stock) fairly valued, overvalued, or still reasonably priced? Selling a broad-market index fund in a bull market that is not in a bubble has historically been a poor long-term decision.

  2. Asset Allocation and Rebalancing: The most professional strategy is to have a target asset allocation (e.g., 60% stocks, 40% bonds). In a strong bull market, your stock portion might grow to 70% of your portfolio. To counteract risk, you would rebalance by selling some stocks (taking profits) and buying bonds to return to your 60/40 split. This is a disciplined, non-emotional way to "counteract" the risk.

  3. Dollar-Cost Averaging (DCA) Out: Instead of selling a lump sum, an investor could initiate a plan to systematically sell a small percentage of their holdings each month. This mitigates the risk of selling everything at a single point.

  4. The Power of Quality: In a bull market, "the tide lifts all boats," but when it recedes, you see who was swimming naked. Focusing on high-quality companies with strong balance sheets and durable competitive advantages is the best defense against a sharp correction.

Summary

The original post provides a basic, cautious introduction to navigating a bull market. It correctly highlights the risk of a subsequent correction and suggests plausible actions like taking partial profits. Its core strategy of selling high to buy back lower is a classic profit-taking maneuver.

However, the post has significant limitations:

• It presents a defensive view of a bull market, framing it mainly as a threat rather than an opportunity.

• It heavily implies a market-timing approach, which is high-risk and often leads to missed gains (opportunity cost).

• Its explanation of "reducing average cost" is an oversimplification that ignores the mechanics of realized gains and additional capital deployment.

• It omits crucial concepts like long-term buy-and-hold strategies, portfolio rebalancing, valuation analysis, and the importance of investing in quality assets.

In conclusion, while the post's heart is in the right place—advising caution—a more robust approach to a bull market involves a disciplined strategy based on personal goals, risk tolerance, and time horizon, rather than a reactive fear of an inevitable correction. The most intelligent investors don't just know what to do in a bull or bear market; they have a plan that works through all market cycles.

Bull Market and Bear Market strategies

Core Concept

The stock market cycles between Bull (rising prices) and Bear (falling prices) markets. An intelligent, educated investor understands these conditions and acts strategically, basing decisions on knowledge of their specific stocks rather than on emotion or market sentiment alone.

Key Differences: Investor vs. Trader

• An investor is attached to the company, understands its business, and can distinguish between a general market decline and a company-specific problem.

• This knowledge puts them in an advantageous position to make informed decisions during market volatility.

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Bear Market (Down Market) Strategies

When the market is falling, you have three main options:

1. Sell Immediately: To minimize potential losses.

2. Hold and Do Nothing: Let the market correct itself without taking action.

3. Buy More (Opportunity): If your analysis confirms the company is still sound, you can buy more shares at a lower price to benefit from the decline.

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Bull Market (Up Market) Strategies

When the market is rising, you have three main options to protect against an inevitable correction:

1. Sell a Portion: Sell some shares at the inflated price to lock in profits.

2. Hold and Do Nothing: Remain invested without taking action.

3. Sell for a Profit: Take full advantage of the high prices and exit your position.

A Key Bull Market Tactic:
Sell a portion of your stocks at the high bull market price. After the subsequent market correction drives prices down, use the proceeds to buy back more shares than you originally sold. This reduces your average cost per share and increases your number of holdings.

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Final Piece of Advice

Base your decisions on knowledge, not feelings. Being thoroughly educated about the companies you invest in and their industries makes market conditions less important, as you can confidently discern real problems from temporary market noise.

Bull Markets in Calendar Days

http://money.cnn.com/2014/03/06/investing/bull-market-five-years/index.html?iid=Lead

Why the Market Is Irrational and What You Can Do About It

http://finance.yahoo.com/blogs/breakout/harvard-teach-investing-111707627.html

3 Stages of a Bull Market and 3 Stages of a Bear Market

2011 Value Investing Congress Notes
http://www.scribd.com/doc/54958483/2011-Value-Investing-Congress-Notes

The swing of the pendulum 
o Constantly going between greed and fear, risk tolerance and risk aversion, and optimism and pessimism
o In theory, the pendulum should be at the happy medium

 On average it is in the middle 
 But it spends little time there
 Excesses constitute the errors of herd behavior

 3 stages of a bull market 
 Few people feel things are getting better
 Most people realize improvement is taking place
 Everyone thinks things will get better forever
 "What the wise man does in the beginning, the fool does in the end."
o The last buyer pays the price 

 3 stages of a bear market 
 Few people realize that things are overpriced and dangerous
 Most people see the decline is underway
 Everyone believes that things will get worse forever
o Great opportunity to buy if we can behave counter-cyclically - Importance of being a contrarian.



Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/  

In a bull market, be prepared for the bear.

"It is not difficult to outperform the benchmark in a rising market.  For the investor, it is more important to be with a portfolio that is defensive enough not to drop too much in a down market."

Follow these tips to find some good stocks to invest in any market scenario

A general trend that one observes in the equity market is when share prices start falling, many investors, especially in the retail segment, follow a wait-and-watch policy to enter the market. They try to look beyond at the reversal of the ongoing trend.

However, by the time they react, equity markets usually move up substantially. By then they find the market overheated and either stay out and wait for the next correction to participate or are left with no option but to invest money at those levels.

As it is sometimes difficult for investors to calculate the reversal in trends at its early stage, most enter when the markets have run up significantly. Stocks provide low risk high returns in long run which makes the point of entry insignificant, however, generally not many investors invest with a long term perspective. (Study the chart below to understand this statement.)

Read more here:  http://www.personalmoney.in/5-tips-to-select-stocks-for-investment/1543

Are you planning invest in the equity markets now?

24 OCT, 2010, 07.09AM IST, VIKAS AGARWAL,ET BUREAU
Are you planning invest in the equity markets now?


The domestic stock markets have had a dream run this year. Good returns have increased the enthusiasm and risk appetite of investors. Strong inflows from foreign institutional investors (FIIs) remain the key factor behind the bullish sentiments in the market. Investments from domestic institutions and individual investors have also increased. 

The recent over-subscription of the Coal India IPO is a classic example of positive investor sentiments in the markets. The market undertone is quite bullish at the moment and this is reflected in the strong bounce-back after every minor correction. Analysts believe the markets are consolidating at the current levels before taking to newer highs in the short to medium terms. 

The important factors to track are the movements of FII funds and sentiments in the global markets. The markets may have a deeper correction triggered by negative sentiments in the global markets. In general, individual investors should stick to the strategy of 'buy on dips'. Investors should identify favourably-placed sectors in the current economic conditions and invest in selected fundamentallygood stocks. 

These are some of the important points investors should keep in mind while investing in the markets: 

Strategies for primary market investments 

The primary market is attractive with many IPOs listing with attractive gains. However, individual investors should invest only their risk capital in IPOs. It is not recommended to borrow money and invest in IPOs for the sake of listing gains. 

The introduction of ASBA (application supported by block amount) makes investments in IPOs more attractive as the money does not get debited from the investors' account at the time of application. It just gets blocked. The money is debited from the investor's account only at the time of allotment and meanwhile the investor keeps earning interest on this blocked amount. Also, it avoids the hassles of tracking refunds. However, the ASBA scheme is applicable only if the investor applies to an IPO through the bank's e-filing route. 

Strategies for secondary market investments 

The stock markets are close to their all-time high and consolidating over the last couple of weeks. There is strong buying support at the lower price levels and some profit booking at the higher levels. A deeper correction cannot be ruled out as the markets have moved in a single direction over the last couple of months. 

Some analysts believe the markets may go through many small corrections rather than a significant deep correction. Therefore, it is advisable to stay invested in the markets and play safe by booking profits at regular intervals. A periodic review of the portfolio based on the current macroeconomic and business conditions, and quarterly results is needed. Investors should take necessary steps and make the required adjustments in their portfolios based on the macroeconomic conditions and company results. 

Investors looking at investing fresh money in equity should first identify the stocks and invest in small lots to average out the entry price. Since it is not possible to time the markets, it is advisable to stagger investments by buying in smaller lots at regular intervals. Small investors should invest in large-cap stocks and selected mid-cap stocks that have good liquidity. It is advisable for investors to invest only their risk capital in equity, and track the market movements and developments related to stocks of their interest regularly. Equity mutual funds are a good alternative for investors who do not have enough knowledge about the markets.




http://economictimes.indiatimes.com/features/financial-times/Are-you-planning-invest-in-the-equity-markets-now/articleshow/6798783.cms

Pick the right stock at right time for returns

16 OCT, 2010, 03.54PM IST,

KAVITA SRIRAM,ET BUREAU 

Investment tips: Pick the right stock at right time for returns

Picking the right stock at the right time, and booking profits, is a challenge for many small investors. With hardly any time for research and a desire to reap quick profits, many investors often rely on friends and expert advice. The risks are considerable even if you chase a rising stock, without comprehending the driving forces.   How do you differentiate an overheated stock from one that has truly appreciated in its intrinsic value? 


Identifying an under-valued stock 


An under-valued stock is a great investment pick as it has high intrinsic value. Currently under-valued , it has immense potential to rise higher and make the investor richer. 


A low price-to-earnings (P/E) ratio can be an indicator of an under-valued stock. The P/E is calculated by dividing the share price by the company's earnings per share (EPS). EPS is calculated by dividing a company's net revenues by the outstanding shares. A higher P/E ratio means that investors are paying more for each unit of net income. So, the stock is more expensive and risky compared to one with a lower P/E ratio. 


Trading volume is an indicator 


Trading volumes can help pick stocks quoted at prices below their true value. In case the trading volume for a stock is low, it can be inferred that it has not caught the attention of many investors. It has a long way to ascend before it touches its true value. A higher trading volume indicates the market is already aware and interested in the stock and hence it is priced close to its true value. 


Debt-to-equity ratio 


A company with high debt-to-equity ratio can indicate forthcoming financial hardships. If the ratio is greater than one, it indicates that assets are mainly financed with debt. If the ratio is less than one, it is a scenario where equity provides majority of the financing. Watch out for stocks that have low debt-to-equity ratio. 


Some other pointers 


Historical data of stocks that have performed consistently and yielded good returns are reliable. A higher profit margin indicates a more profitable company that has better control over its costs compared to its contenders in the same sector. 


Weeding out over-heated stocks 


Avoiding over-priced stocks that could plunge anytime is as critical as picking the right stocks. Buying over-heated stocks and losing money in a bubble burst is not an uncommon phenomenon in the markets. Stocks that have moved up the ladder very quickly are potentially risky. The sudden spurt could be based on a rumour or event not backed by strong fundamentals. 


Good market conditions or bull runs do not last forever. Investors, who believe that good times are here to stay often burn their fingers. On a similar note, an over-valued stock has little scope or space for upward movement and could lose its momentum anytime. 


A little bit of research and analysis will help investors make prudent investment choices even in bear market conditions.

http://economictimes.indiatimes.com/features/financial-times/Investment-tips-Pick-the-right-stock-at-right-time-for-returns/articleshow/6759442.cms

What to Do in a Up (Bull) Market?

The stock market often falls under the conditions of the so called bull and bear markets. Intelligent investors are well familiar with the conditions of both and know exactly what to do.

A bull market may make your stock's price increase, from which you can benefit in one way or another.

However, the possibility of your stock becoming too costly always exists since after the up, a down in the price may follow, which may be of an extreme speed.

So, under bull market conditions you can do one of the following in order to counteract the potentially negative effects.

• First of all, you can sell a part of the shares and use the money to repurchase the stock when its price falls again.
• Secondly, you can leave the market work its way through the imbalance with no action from your side.
• Thirdly, you can take advantage of the high prices and sell the stocks for a profit.

Never forget that a market correction will follow that may push the price of your stock below its initial level.

A useful strategy to counteract the negative effects of a bull market is to sell a portion of your stocks at the current bull market price, which will be greatly higher than the one at which you have purchased the stock.

• After the market correction is at place you can use the money you have acquired from the bull market sale to purchase shares at the current lower price. As a result you will have more stocks than you used to have before the bull market.
• You have not only avoided losses but also have reduced your average cost per share.

****Bull and Bear Market Strategies - Damn Bloody Good Gems!

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Summary

The post outlines a cautious approach for investors during a bull market, framing the rising prices as a potential risk that requires action to "counteract the potentially negative effects."

Key Points:

• Core Dilemma: While a bull market increases stock prices and provides profit opportunities, it is always followed by a correction that can rapidly erase gains.

• Suggested Strategies:

  1. Sell a portion of shares with the plan to buy back after the price falls.

  2. Do nothing and let the market correct itself.

  3. Sell entirely to realize profits.

• Recommended Strategy: The post specifically advocates for selling a portion of stocks at high bull-market prices. After the inevitable correction occurs, the investor should use the proceeds to buy back more shares at a lower price.

• Claimed Benefits: This approach is said to help avoid losses, increase the total number of shares owned, and reduce the average cost per share.

Critical discussion on this topic - Click here:

https://myinvestingnotes.blogspot.com/search/label/investment%20strategy%20in%20a%20bull%20market

What to Do in a Down (Bear) Market?

The stock market often falls under the conditions of the so called bull and bear markets. Intelligent investors are well familiar with the conditions of both and know exactly what to do. 

Under a down market you have several options.

• One of them is to sell immediately in order to minimize your losses.
• Another option is to let the market work its way through the problem with no action from your side.
• A third option is to benefit from the stock decline and add some more to your portfolio. But, this should be done only if you don't perceive that there is something wrong with the company that has led to the stock decline.

****Bull and Bear Market Strategies - Damn Bloody Good Gems!

=====

Here is a summary of the above post on what to do in a bear market.

The post outlines three primary courses of action for investors during a declining (bear) market.

Key Points:

• Core Premise: Intelligent investors know how to act in both bull and bear markets.

• Suggested Strategies:

  1. Sell Immediately: The first option is to sell holdings quickly to minimize potential further losses.

  2. Take No Action: The second option is to do nothing and wait for the market to recover on its own.

  3. Buy More: The third option is to purchase more shares at lower prices, effectively "buying the dip."

• Important Caveat: The post advises that investors should only choose the third option (buying more) if the stock's decline is not due to a fundamental, company-specific problem.

For a critical discussion on this topic - Click here:

https://myinvestingnotes.blogspot.com/2025/11/what-to-do-in-down-bear-market.html

Should You Keep Investing in a Sinking Market?

Should You Keep Investing in a Sinking Market?

By BestStockTradesBlog

Sure, it’s been a rocky year in the markets—to say the least.  It is so hard to for anyone to hide from the perpetual bad news, so in times like this, it’s easy to let our emotions cloud our good judgment.  Despite the erratic movements of the global markets lately, many of us continue, with great discipline, to plow money into our current savings programs, whether through brokerage accounts or our 401k plans.  But, is this the right thing to do?  Or, are we simply throwing good money after bad?

Everybody loves investing when the market is up because we often see immediate returns on our investments.  When the markets are down, however, our fears tend to paralyze our inclination to keep investing new dollars.  Psychologically and emotionally, nothing is more depressing than seeing your money evaporate.  But if you invest regularly and have some time before retirement, bear markets can be quite a blessing.  

Upward Bias

If history is any indication, we can safely assume that the stock market is expected to yield positive long term returns over time.  Does this happen every year?  Of course not; performance will vary by time period and asset class, and there will always be bad years mixed in with good years.  That’s just the way markets work. The best time to buy, or keep buying, is when the market is in the toilet. For the past few decades, every time the market took a significant fall, investors who bought on the dips were soon were rewarded with a profitable bounce.  Let’s look at the numbers a little closer, using several indexes as benchmarks.  The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market, the Morgan Stanley EAFE index (Europe, Australia, and Far East) is a proxy of for large caps in the foreign developed markets, and the The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe.

                                      Returns 1980 –  2007                          
                 
                    Russell 3000         MSCI EAFE          Russell 2000
1980                  32.59                       24.43                    38.57
1981                  (4.44)                       (1.03)                      2.00
1982                  20.66                       (0.86)                    24.88
1983                  22.68                       24.61                    29.09
1984                    3.43                         7.86                     (7.28)
1985                 32.13                        56.72                    31.07
1986                 16.71                        69.94                    5.70
1987                   1.94                        24.93                    (8.78)
1988                 17.82                        28.59                    24.91
1989                 29.31                       10.80                     16.24
1990                 (5.06)                      (23.20)                  (19.52)
1991                 33.32                       12.50                    46.04
1992                   9.69                      (11.85)                   18.42
1993                 10.88                       32.94                    18.89
1994                 (0.25)                        8.06                     (1.82)
1995                 36.83                       11.55                    28.45
1996                 21.84                         6.36                    16.54
1997                 31.79                         2.06                    22.38
1998                 24.13                       20.33                    (2.56)
1999                 20.89                       27.30                    21.26
2000                  (7.46)                    (13.96)                   (3.03)
2001                (11.46)                    (21.21)                    2.49
2002                (21.55)                    (15.66)                 (20.48)
2003                 31.04                       39.17                   47.25
2004                 11.95                       20.70                   18.32
2005                   6.12                       14.02                      4.55
2006                 15.72                       26.86                    18.37
2007                   5.14                       11.63                     (1.56)

The data depicted tells a story, the years that follow a market downturn can be quite lucrative, often wiping away any losses experienced in the preceding period.

One of the worst sustained bear markets of the past half century occurred during between the late 1960’s and early1980’s.  Yet, had you continued to invest on a regular basis during that dark period, you would have set up your portfolio for a long and prosperous run shortly thereafter. Once the market turned around in the early 1980s, investors who stayed the course enjoyed exceptional returns over the following 15 year period.  Using the Dow Jones Industrial Average as a proxy,
from 1975 to 2006, there were 23 positive years and 9 negative years. If you were to take a simple average of the yearly returns over this time period, you would come up with an average return of 10.83%.  

Still not convinced?  Let’s look at the crash of 1987.  An investor who bought into the market right after the crash of 1987 would have fared very well over the next 24 months. From its low in the fall of 1987, the Dow moved up 56% by the end of 1989.  See, if daily market returns are random (and they are), market timing is a flip of the coin. Investors who attempt to predict market drops are just as likely to avoid them as to miss out on strong return periods.  That is why it would be a mistake to sell out of the market or cut back on your investments during slow times. Because once a market bottoms out, the returns on the bounce can be exceptional, and the market can turn around quite rapidly, which we can never predict in advance.

Dollar Cost Averaging

One of the most effective ways to invest, in particular when the markets are down is dollar cost averaging.  Dollar-cost averaging is an effective wealth-building strategy that involves investing a fixed amount of money at regular intervals over a long period. This type of systematic investment program is used by anyone participating in their company’s 401k or 403b retirement plan.  

In “bullish” markets you buy fewer shares per dollar invested because of the higher cost per share. But, when the markets are down (or bearish), it’s quite the opposite.  You purchase a greater of number of shares per dollar invested because you are buying positions at (presumably) cheaper prices. The blended average of these purchases (high and low) becomes your average cost basis.

So what should you do in a bear market? You do nothing different!  If you’re a long-term investor you do the same thing in a bear market that you would in a bull market, keep investing.

None of us have the clairvoyance to predict market returns.  And those that claim they can are full of hot air.  So the best thing that we can do now, and always, is follow a reasonable investing strategy structured upon our past experience, our common sense, and our reasonable expectations for the future.

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