Note: The NASDAQ and the S&P 500 are in bear markets. As of this writing, the Dow Jones has not entered one.
Let’s shut down the noise and put everything into perspective. I think that it is important to understand what could happen. It is only in that place that you can make good decisions.
Let's start by clearing up some confusion about how bear markets work. There are good markets, and then there are bad markets. Good markets are called bull markets, and bad markets are called bear markets. Investors typically make money in bull markets and lose money in bear markets.
I consider myself a student of how the stock market works. In all my decades of research, I break it down this way. A bad market can come in 5 forms.
1) A Correction
This is a bad market that lasts for a short period of time. The maximum loss is up to 20%. Corrections are very commonplace. It is highly unlikely that what we are seeing today is a correction.
2) A Stock Market Crash
This is another bad market that lasts for a short period of time. The market will lose over 20%. What people don't realize about a stock market crash is that the market recovers quickly as well. Having said that, this is not a stock market crash. The pandemic stock market decline is a good example of a crash. Pop culture finance calls this decline a bear market. I think that they are terribly wrong about that call.
3) An average Bear Market
This is another bad market that historically lasts 12 months or so with an average loss of -30%. Only time will tell if this is an average bear market.
4) A Big Bear Market
This is a bear market that you want to be very careful when investing. The losses average -50% to -60%. The last two bear markets would fit into this category. Unfortunately, I think this is a higher probability outcome for the stock market.
5) A Super Cycle Bear Market
This is a bear market that will reshape everything. The losses would be greater than -60%. The 1929 to 1932 bear market with losses of -86% offers up a good example. The situation in this country would have to spiral out of control for this to happen.
Why am I telling you this?
Pop culture finance will have you believe bear markets are not a big deal. It can be a big deal, and you need to understand that. The problem is that the environment is ripe for any of the above to occur. Further, investors think that they just have to ride the roller coaster and endure the losses. That couldn’t be further from the truth.
This is why it is important to have a Plan B strategy for your investments. If you are interested in learning more about a Plan B strategy, send us an e-mail at firstname.lastname@example.org, and we can tell you your options.
You don't have to lose money in a bear market!