The last few weeks has seen the market make a bit of a rally. Even still it is known that when times get rough, investors often get caught up in the moment-to-moment market movements and are distracted by the daily headlines. Even though this market has been “different” that others in the past, one common attribute that all past bear markets share is that they eventually ended. Although you can’t control when market declines occur or how long they last, you can control how you handle the situation. These actions can significantly affect your investment success over the long term.
Buy High, Sell Low
There’s little doubt about it, when financial markets are on the rise, the desire to invest grows. And when markets decline, investors tend to run for cover. People tend to feel comfort in the market and buy in the most inopportune times. One of the greatest flows of money into the market occurred right as it was peaking in early 2000, arguably the worst time to invest. Two of the highest flows out of these funds happened when the market hit bottom in the fall of 2002 and the winter of 2008.
The lesson: By letting the results of the market drive their behavior, investors risk buying high and selling low. And because it’s almost impossible to determine the best time to get back in, they also increase their chances of missing out on the rising returns that typically occur during market recoveries. So ask yourself, if you sold out of the market at any time, what is your magic number to get back in?
Gain confidence from the past
Since the early 1900s, there have been two full secular bear markets — the Great Depression and the 1970s. Although the environment and ending results for each is unique, they both offer important lessons that can help guide you through today’s trying markets. Don’t underestimate the power of time and dividends. When markets get rough, investors tend to focus on weekly, daily and even hourly price movements.
When markets are in turmoil, emotionally driven investors tend to sell their investments and get out of the market altogether . As a result, valuations can reach low levels — even for companies with sound balance sheets, strong management and good long-term prospects. In these markets, assessing a company’s true worth and long-term potential requires more than reviewing quarterly earnings or Wall Street research.
The Great Depression — September 7, 1929, to April 28, 1942
Widespread bank failures, plummeting stock prices and a surge in bankruptcies were all defining events of the Great Depression. During the first few years, the U.S. government did little to stem the crisis. In fact, the Reconstruction Finance Corporation — an independent agency established to shore up banks, farm mortgage associations and railroads — wasn’t set up until 1932. Also, at the time of the crash of 1929, there was no Federal Deposit Insurance Corporation (FDIC) to help stave off bank panics, no Social Security to assist the elderly and disabled, no unemployment insurance and no Securities and Exchange Commission (SEC) to regulate financial activities. These organizations were established in the 1930s.
The 1970s — February 9, 1966, to August 12, 1982
This was the generation of the go-go years and the “Nifty Fifty.” But despite the seemingly cheerful monikers, it was an era besieged with strife. The stock market’s muted growth over this period reflected the nation’s growing economic difficulties, namely surging inflation and interest rates. Americans were sharply divided over Vietnam and beset by social upheaval. Within the space of two months in 1968, both Robert Kennedy and Martin Luther King, Jr. were assassinated. Then came the oil crisis, the Watergate scandal and a 48% stock market decline — led by the fall of the once indomitable Nifty Fifty — and a severe U.S. recession.
Now — March 24, 2000, to December 31, 2008
Many believe we are in the midst of a bear market that began at the Internet bubble’s end. Today, the troubles of Wall Street started with the bursting of the housing bubble and spread to financial markets around the world. Although the media has conjured the specter of the Great Depression, clear differences exist. The world’s governments have acted quickly. In an unprecedented move, central banks around the globe have coordinated their efforts to ease the effects of the crisis.
Key Pointers In a Bear Market
- Many good companies still exist today and continue to offer products and services that consumers need. Investing in an actively managed investments with a carefully selected, diversified portfolio puts you in a position to participate in these companies’ strengthening returns when reason replaces fear in the markets.
- Consider the consequences before you sell. Selling during or after a decline limits your ability to participate in any recovery.
- Even when prices decline, the number of shares in an account stays the same. If you’re receiving dividend and capital gain distributions, these payments are based on how many shares you own — not the share price. Shareholders who reinvest distributions will be buying more shares when prices decline
Source: The Capital Group Companies
Past performance is no assurance of future results. The market for all securities is subject to fluctuation and loss of principal.