Pull-Backs, Corrections and Bear Markets
A “bear” market is a sustained drop of 20% or more in the overall stock market from its previous high point. The performance of the Dow Jones Industrial Average (the Dow) is often used as the benchmark. It is interesting to note that such drops of 20% or more are called “bear” markets because, allegedly, when a bear attacks, it knocks its prey down with its claws (a theory I’d rather not test). On the other hand, a sustained period of increases is called a “bull” market. This time the label is derived from the way a bull attacks an adversary by throwing it upward with his horns. And, in case you are wondering, a fall of 10% (but less than 20%) is generally called a “correction,” and a slide of 5% (but less than 10%) is often called a “pull-back.” (Please keep these percentages in perspective the next time a TV or newspaper commentator is fretting over the market’s activity – only to find out it’s a piddling ½% drop. I suppose they’ve got to fill newspaper pages and TV airtime with something.)
Recent History: Like an airplane on takeoff, the Dow experienced its most spectacular rise from 1982 to 2000, growing from 777 points to 11,723. It then stalled during 2000 to 2003 and fell by over 40% to 7,286. The last major market sell-off, which is still very fresh in most investors’ minds, began on October 9th, 2007 when the Dow had reached an all-time high of 14,165. A national mortgage meltdown, coupled with the worst recession since the “Great Depression,” sent the markets into a tailspin. Just seventeen months later, on March 9th, 2009, the Dow had plummeted 54% to a low of 6,547!
A Not So Bold Prediction: Pull-backs, corrections, and bear markets are coming. They are normal. That doesn’t mean you should liquidate your investments and sit on a comfy pile of cash on your living room floor. The truth is, most financial experts expect and plan for these market movements. Unless they have crystal balls, however, they can’t tell you when a drop will occur. Some financial professionals may believe (and/or tell you) that such negative events are imminent (and some profit greatly from such strong opinions).
Prudent Clichés and Quotes: Hope for the best, but plan for the worst. Don’t put all your eggs in one basket. The best way to avoid a punch is not to be standing there. These adages make a lot of investment and financial sense, especially as you get closer to, or move through, retirement. Of course, the best time to apply such wisdom is before a bear market wanders into your retirement camp. When that happens it might be too late to drop everything and run. Get guidance from an experienced investment “park ranger” who has dealt with these beasts before. You’ll avoid panic and be better prepared the next time a bear comes around!
David D. Holland, a CERTIFIED FINANCIAL PLANNER™ practitioner, hosts a weekday radio show at 9AM on AM1380 Ormond Beach, AM1230 New Smyrna Beach and AM1490 Deland. He has also authored two books in his Confessions of a Financial Planner series. Holland offers investment advice through Holland Advisory Services, Inc., a registered investment adviser in Ormond Beach. He can be contacted at (386) 671-7526. Email your financial questions to info@DavidHolland.com.