If you're an investor, you've probably been less than ecstatic lately when you open the newspaper and see what's happening in the stock market.
From last October to the end of June, the Dow Jones Industrial Average fell about 20 percent. And stock prices continued to slide during the first two weeks of July. Are we in a "bear market"? And, if so, how should you respond?
First of all, you might want to know a little bit about the nature of bear markets. By one commonly used definition, a bear market occurs when stock prices have declined by 20 percent or more. Bear markets last, on average, about 14 months; a two-year bear market is considered to be on the long side.
Generally speaking, a bear market is triggered by unexpected events or economic conditions, which, in 2007 and 2008, include the credit crunch and soaring oil prices. And bear markets can end as quickly, and as unpredictably, as they began.
You may well feel the need to do something. Here's an idea: Why not approach a bear market the same way you would an actual bear? Consider these suggestions:
• Stay calm. If you were to ever encounter a real bear, you'd need to avoid panicking. And the same is true with a bear market. You can't control stock prices, but you can control your reaction to them. If you remain calm and survey your individual situation with an understanding of what's happening in the broader market, you'll be likely to make rational decisions.
• Make no sudden moves. When facing a bear, you can't make sudden moves. And when you're in the midst of a bear market, you also want to avoid reacting too quickly. If you've built a portfolio of quality investments that are suitable for your goals, risk tolerance and time horizon, stay the course and stick with your long-term strategy-- even during a bear market.
• Don't try to "outrun" a bear. Just as bears are faster than you are, the movements of the stock market are typically too quick for most people - even so-called market experts - to anticipate. Nonetheless, many people try to "outrun" a bear market by jumping out of it, thinking that they can profit from missing some of the market's worst days.
But when you head to the investment sidelines, you can also miss some of the market's best days, too. Either way, you're trying to time the market, and it's almost impossible to do so consistently.
Even if you follow these ideas, you may find it hard to stay positive in the midst of a prolonged slump. Staying invested throughout market ups and downs can help you work towards your long-term strategy.
By observing the rules for dealing with a bear and by focusing on your long-term strategy you can not only survive a bear market, but also use it to your advantage. And that thought should make your situation more "bearable."