Will the stock market slip back into bear territory? History says, yes.
A bear market briefly gripped Wall Street yesterday as the S&P 500 and Dow Jones Industrial averages slipped 20 percent below market peaks reached last April.
Fears that Greece might default on its debts propelled the selloff, which was also fueled by comments by Federal Reserve Chairman Ben Bernanke, who told a joint Congressional committee that the U.S. economy was faltering.
A bear market, defined by a stock market decline of 20 percent or more, stems from low investor confidence that drives down stock prices and triggers more selling. Bear markets present grizzly challenges for investors seeking stock gains, but they are not uncommon. Seeking Alpha contributor John C. Lee explainsthat bear markets occur an average of every three to five years. A bear market typically lasts 17 to 18 months, but can be as short as two months and as long 56 months. Some Wall Street observers like to say that the market goes up a third of the time, down a third of the time and sideways a third of the time.
“That may not be far from the truth,” said Lee. “Since 1900 until now, we’ve been in a bear market for 383 months, or 32 years. This means that we’ve been in a bear market for 30% of the time. Pretty close to a third, I’d say.”
Bear markets, characterized by flat or declining stock markets, can be stressful for retail investors who see the value of their portfolio stagnate or decline. A bear market will claw at gains, unnerving Main Street investors who historically join the selling frenzy as prices near the bottom, incurring big losses just as the market begins to recover.
To a certain extent investors can avoid the bear’s bite by investing in a diversified portfolio of products, and holding investments for the long term. Investors with a healthy appetite for risk often see a bear market as a buying opportunity and shop for good stocks at great prices. More than 28 percent of Millionaire investors surveyed by Millionaire Corner in August said they took advantage of last summer’s steep selloff by purchasing additional stocks. More than 58 percent of these typically sophisticated investors viewed the August downturn as based more on emotion than on factual information.
While Millionaires tend to be confident in their own investment abilities, they weigh risk and diversification heavily in their investment decisions. Wealthy investors consider the level of risk associated with a product as their top investment factor, according to the results of a December Millionaire corner survey. Diversity of investments is the second most important factor, while tax implications rank third.