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How Long Will the Bear be in Town?

7 July 2008 - Markets - Editor

In a US stock exchange trading week that was cut short by 4th of July celebrations, investors were coming to terms with the fact that a bear market has officially arrived. It is commonly accepted in investment circles that a 20 percent drop from the highs in the market, as measured by the Dow Jones Industrial Average, Nasdaq and S&P’s indices, is confirmation of a bear market.

In an effort to look on the bright side, some investors are of the opinion that, now that the decline has reached the historically-based 20 percent bear market indicator, the market has suffered most of its losses and is unlikely to deteriorate further. In view of the fact that the market at present is anything but typical, whether this is true or not remains to be seen. However, history reveals that a bear market is likely to drag on for some time, and it is this extended time factor that often presents the greatest challenge to investors, especially in a society that is geared to instant gratification. Granted, it is not easy to watch your investment dwindle and the temptation to sell and cut your losses may be overwhelming, but analysts generally agree that this would be unwise and waiting it out would, in most cases, be prudent.

There is already evidence in the market that some investors have succumbed to bear market panic as marked by the withdrawal of over $80.4 billion from US domestic equity funds over the past twelve months, while overseas funds attracted $75.7 billion from American mutual-fund investors. However, this move to overseas investment did not have the desired results for US investors, as foreign stocks lost nearly as much as US equities, with many markets world-wide facing common challenges.

Although bear markets in the past have played out with some aspects unique to each one, a common factor has been the tendency for investors to despair and offload their investments indiscriminately when the market is near, or at, its lowest level. This can be the perfect opportunity for investors with some ready cash and a long-term outlook to take advantage of the market by buying low, with the aim of riding out the current storm and having the prospect of selling high in the future.

 


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