October 17

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Bear Market Country

FAMILY UPDATE

The family took a quick trip to Pittsburgh for a couple of days. My kids have never seen the colors of fall before, and we thought it would be a great experience. The weather was absolutely perfect: crisp days, lots of colors, and blue skies.
Having lived in Pittsburgh for thirty-four years, I forgot how much I miss fires in the fireplace. There is just no way to recreate that feeling in Florida. Up north, you can be lazy because it is so cold outside you have no choice but to cozy up to the fire.
My kids thought loved fires too. They especially liked roasting marshmallows over the fire in the fireplace. I never thought to do that as a kid. It seems so obvious now.

We are in Bear Market country. I have been through several of these during my career. I have zero concerns for those of you that utilize a balanced and diversified portfolio of stocks and bonds.

What is a bear market? It is very simply a drop of 20% or more in the stock market indexes (Dow Jones and S&P 500). A bear market is symbolized in the form of a bear that is clawing down, compared to a bull market symbolized by a bull striking up with its horns.

Some things to remember:

#1 While bull markets are fueled by optimism, bear markets are just the opposite. Bulls are generally powered by economic strength, whereas bear markets often occur in periods of economic slowdown and higher unemployment. This particular bear market is very strange in that unemployment is almost at zero.

#2 Instead of wanting to buy into the bear market, investors want to sell, often fleeing for the safety of cash or fixed-income securities. The result is a seller’s market. The sellers are guaranteeing their losses.

#3 Volatility such as you are seeing now has no long-term effect on your financial well-being. Why? Because markets recover. Stocks lose 36% on average in a bear market. By contrast, stocks gain 114% on average during a bull market.

#4 Understand that bear markets are normal. There have been 26 bear markets in the S&P 500 Index since 1928. However, there have also been 27 bull markets—and stocks have risen significantly over the long term.

#5 Realize that bear markets tend to be short-lived. The average length of a bear market is 289 days or about 9.6 months. That’s significantly shorter than the average length of a bull market, which is 991 days or 2.7 years.

#6 It is essential to understand that half of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market. The best way to weather a downturn could be to stay invested since it’s difficult to time the market’s recovery. Missing a few strong days could badly damage your long-term returns. The market was up over 5% during a two-day span last week. That is 5% you will never get back if you had cashed out your investments.

#7 Bear markets can be painful, but overall, markets are positive the majority of the time. Of the last 92 years of market history, bear markets have comprised only about 20.6 of those years. Put another way, stocks have been on the rise 78% of the time.

#8 It is also essential to understand that the combination of fast-moving information and more market participants means that the stock market in general is more volatile than it used to be. With more day traders and speculators, the markets move up and down more often (usually for no real economic reason).

#9 In the short term, pulling your money out of the market might be the easy thing to do. But the thing that gets people is once you're out, it's hard to convince yourself to get back in, especially in the near term. So don't let your ego convince you that you're capable of timing the market, and don't let your emotions drive your decisions. If you plan on becoming a market timer, remember that you will have to be correct twice. Once when to get out and again when to get back in.

Be Blessed,

Dave

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