Last Friday (8/21/15), the Dow Jones Industrial Average dropped 530 points. That made the loss for the week over 1000 points, and it was a 10% drop from May’s market high. The S&P 500, a larger index, dropped 7 1/2 percent for the week, and the Nasdaq dropped 9.8% Depending on the duration of the pullback, it may be a market correction or it may be the beginning of a bear market. If it’s of short duration, this will probably be seen as a market correction. A correction is a 10% drop in the stock market, usually lasting about 2 months. Corrections generally happen about every 18 months, and we haven’t had one since 2011. They aren’t bad, they just keep stock prices from being over-inflated. A bear market, though is another animal. It lasts longer and investors are more pessimistic. This pessimism feeds on itself. The pessimism causes more price drops, which causes more pessimism, which cause more stock drops. Generally, if the market drops by 20% or more, it’s considered a bear market.
A few weeks ago, I did a story called Winter is Coming but Don’t Panic! 10 Money Lessons I’ve Learned from Geekdom. And I quote:
Don’t Panic! (The Hitchhiker’s Guide to the Galaxy): Yes, bad times will come. The best thing to do is keep your head and stick to your plan. I invested through the dot com bubble and the great recession, and because I didn’t sell when the markets were down and I kept investing in companies I believed in, I’m in a better situation that I would be otherwise. Admittedly, I’m not a retiree, so I had time for the markets to recover. And now, I have made sure I protect myself as I get older by having a more diverse portfolio that includes tax-free bonds.
Bear markets can be tough, especially for retirees who can’t keep adding to their investments. Market traders can lose a lot of money, because it can be difficult to know when the market has hit bottom. Companies can shed jobs, or worse. But bear markets eventually turn into bulls. Here’s a chart of Dow levels in the last 10 years. At its February 2009 low, the Dow closed at just over 7000 points. Friday, even with the drop, it was hovering at 16,459 points. That’s well over the 13,930 points it reached in October 2007.
Here are some things to remember as the stock markets open today:
- We don’t know whether this is a correction or a bear market. It’s difficult to tell at this point. It may be just a long overdue correction, pulling the market down to earth.
- All gains and all losses aren’t real until you sell the stock. Unless your personal circumstances force you to sell, you are better off hanging on for the ride.
- Investors who continued to make regular stock purchases (like through a 401K or dividend reinvestment plan) during the great recession are in a much better place than they were before the recession. This is because they got to purchase stock at greatly reduced prices, and they have enjoyed a lot of price appreciation since that time. Bear markets can be very lucrative if you have a dollar cost averaging strategy, as long as you remember to factor in your fees.
- Even in a bear market, there are companies and sectors that do well. “The Market” is not a monolith.
A stock market downturn is a scary situation. You see your investment and retirement account balances going down, and it can cause you to lose some sleep. It’s important to keep a long-term perspective. Whatever Friday means, it doesn’t mean it forever. The surest thing about life, the weather, and the stock markets is that if you wait long enough, you’re going to see changes.
This article reflects my personal opinion. I realize I am invoking the animal spirit of the bear, hopefully I haven’t cursed us all. I am not an economist, just an investor sharing my thoughts and experiences. Past performance does not determine future returns. If you are going to make an investment, you should do lots of research beforehand.
References and Further Reading
Does Dollar-Cost Averaging Make Sense?-From Forbes
Q&A: What a Stock Market ‘Correction’ Means to You-from ABC News