Bear Market, You Say? What It Means & Why You Shouldn't Panic
If you are reading this then perhaps the term ‘bear market’ is one that is not so familiar to you. In which case, I will share with you a very basic and easy to understand definition…
‘A bear market is a decline of 20% or more from recent highs’
This can relate to an individual stock but is most commonly used to describe when a popular ‘staple’ of the investing world such as the S&P 500 takes a hit just like it has in recent weeks. As of Monday,13th June 2022, the S&P 500 is down 21% for the year and will likely continue to drop. It’s in bear market territory…
What Causes Such A Damaging Decline?
This is a question I am sure you have asked yourself many times and, when it comes to entering bear market territory, there are a few possible reasons. Here’s 3 which, in my opinion, contribute to the current financial situation we find ourselves in:
– struggling economy
– global pandemic
– international war and conflict
The market post lockdown restrictions being lifted was bouncing back with businesses opening up once again. Since this initial bounce back, the pandemic has continued to effect our lives and, as a result, the stock market. Combine this with a war that doesn’t look like ending any time soon and you are left with the economy taking a massive hit and people beginning to panic and sell their investments. This is continuing to happen and it seems that the 21% decrease is probably not the full extent of this current market drop.
No need to panic! There is opportunity for the patient and disciplined…
Pretty hard not to worry, right? I understand. Concern amongst all is justified. However, there is a definitive line between concern and panic.
When in a panicked state, we make decisions and take actions before thinking. The same happens in the stock market. Your portfolio may well be in free fall at the moment and you may be about to sell your investments. Perhaps your justification will be damage limitation?
I too have a portfolio in a, shall we say, ‘worse for wear’ state. So, what am I going to do?
Nothing. That’s right, nothing.
If I were to cash in now and sell my investments I would be making a loss. Who wants to make a loss? Also, I am confident the market will come back stronger than ever. My evidence for this, of course, is history.
And now, with the justification of why we shouldn’t panic, you should now in turn see the opportunity. Imagine if you sold all of your investments in 2002, or even 2008/09… you would have ended up pretty gutted right?
‘Whether we’re talking about socks or stocks, I like buying quality merchandise, when it is marked down‘ – Warren Buffet
In this analogy, I see index funds as ‘quality merchandise’. Whether it’s the FTSE 100 or the S&P 500, you need to consider investing now whilst everything is ‘on sale’. Make sure to diversify your portfolio as much as you can to prevent catastrophic blows and always think before you sell. Good things come to those who wait.
Until next time,