Ignore the Hype

Chapter 13How to Survive a Bear Attack

If you want your money to grow, you'll have to invest in a way that exposes you to periodic market sell-offs. Avoiding bear markets is almost impossible; your goal should be to prepare yourself to withstand the inevitable fluctuations markets are subject to so that you can survive bear markets and then thrive when times are good.

Bear Markets: You've probably heard the term before, but do you know what actually constitutes a “bear market”? Traditionally, the term means that the market in question has declined at least 20% from a recent peak. When people refer to a bear market in stocks, they usually mean that a major index such as the Dow Jones Industrial Average (DJIA) or S&P 500 (S&P) has declined by at least 20%. When smaller subsets of the financial markets such as small company stocks or oil or technology stocks have declined by at least 20%, market participants generally declare a bear market in that specific sector, but not in the markets at large.

Although a bear market is characterized by a 20% decline, there are many instances when markets sell off, but don't hit that 20% threshold. When markets fall at least 10% but less than 20%, the decline is referred to as a “correction.” Corrections, though not quite as deep as bear markets, are far more common, and can still be painful.

According to Ned Davis Research the S&P 500 has experienced 95 corrections of 10% or more since 1928. There have been 25 bear markets during that time ...