Bear Market: A Bargain or a Boondoggle?
By
Jerry Ryan
Given the recent decline in the US and foreign stock markets, the Bears
have come out of hibernation and stand toe-to-toe with the Bulls on Wall
Street. Big decisions must be made: whether to buy into this volatile
market, hold for the long haul or get out all together.
The recent market correction may or may not technically constitute a
bear market, but a 20% drop in the Dow Jones industrial average puts a
serious halt to the bull market's hysteria. The definition of a bear
market varies depending upon who you talk to. However, a drop in the Dow
or Standard & Poor's 500 index of 20 to 30% is a sure bet for one.
Sometimes the best example of what course of action to take in a bear
market is to look at the last major bear market. That occurred in
1973-74. The market lost about half its value. Wise investors like
Warren E. Buffet bought into the market while many where getting out.
Buffet's contrarian views proved profitable and made him one of the most
renowned investors in the world.
Lately, market corrections in the Dow Jones industrial average has been
seen as a buying opportunity—a way to get good, quality stocks at a
fire-sale price. Even after the 512 point plunge, a percentage loss of
6.4%, in the Dow on Aug. 31, investors summoned the courage to buy
stocks and created a 288 point rebound the next day.
In addition, most corrections follow a period of excessive growth in the
market. From September, 1986 to Aug., 1987 the Dow rose 1,000 points
only to give back that gain by mid-October. During the next three years,
the market nearly doubled its size.
Investors must weigh many factors before buying into a stock. The most
important factors are profitability and management. Is the company
well-managed? Does the company spend capital on research and
development? Is the company a market leader with a niche that is
untouchable by it competitors? Does the company have a solid plan for
future growth? Basically, will the company make money?
The next question to ask should be, does volatility fit my investment
strategy and goals? Market downturns and volatility have a greater
impact on short-term investors than long-term investors.
Investors should be wary of economic conditions which effect the stock
market and corporate profits. Changes in interest rates, gross domestic
product (GDP), and earnings reports can profoundly enhance a market
downturn or up tick. Even unsettling political news can disrupt
market—at least temporarily. Good companies can weather temporary
setbacks, poor companies may not.
Look for strong companies with a solid management philosophy, a proven
track record and a strong consumer market if you chose to buy stocks.
Remember that good stocks rise and fall like the rest of the market.
Holding stocks when a market goes south can be heart-breaking—watching a
stock drop from $50 per share to $40 per share makes any investor
uneasy. Before unloading the stock, refer to your investment strategy.
Are you in for the long haul? Also, look at why the stock lost value. Is
it a loss in corporate profitability or is the stock just following
market momentum. Remember your supposed loss may be someone else's
fire-sale bargain.
Getting out of stock is the option for the faint at heart, but that
depends on your financial strategy. If your goals are short-term, a
large correction could diminish your portfolio by 20-30%. That could put
a pinch on your retirement plans or your child's education funds. You
should consult your investment advisor to see what is best for you.
A flight to safety by moving investments from stocks to bonds or cash
may inevitably be a good bet, but returns over the long-term are better
in the stock market. Good research and a strong investment strategy
will not insure profits, but it can get you through the down time and
position you when the bulls run again.
informedinvestor.com |
