Technically speaking, the stock market is already in a “correction.” A correction is defined as a drop of more than 10%. So, what qualifies as a bear market? What is meant by a bear market, and perhaps most importantly of all, is this a bear market?
What Constitutes a Bear Market?
Just like a correction is defined as a drop of 10% or more in the stock market, a bull market is defined as a drop of 20% in the markets.
How do you measure for a bear market?
First you have to pick an index, or other indicator for your measuring. A popular one is the S&P 500. Then, you calculate from the tippy top of your market indicator, and when it gets 20% lower than that, then you can call a bear market. Technically, there should also be widespread negative sentiment, and some of that stuff, but a financial website writer on a deadline likes hard numbers. So, according to the folks over at MarketWatch, we will be in a bear market if the S&P 500 closes below 3.837.25, then we have ourselves a bear market.
Obviously, if this is a real bear market, it will do more than touch that number and then pop back up, but if it closes below 3.837.25 and stays at or under that number for a while, more people than just financial writers will be calling it a bear market.
Is This a Bear Market?
What are the indicators of a bear market? A real bear market should be a long (at least a few months) sustained period of both negative sentiment (not necessarily selling) and stock prices down at least 20% as far as I’m concerned.
If everyone was saying the stock market was 10% overvalued before it started heading back down, shouldn’t that 10% not count? After all, that is more of a coming back to reality than any sort of collapse. Maybe we should be calling this bear market a little lower, maybe 25% or even 30%. End the end, it doesn’t really matter. You can say bear market now if you like, or you can never say it. Terms are irrelevant.
What is relevant is money and your investments.
What To Do In a Bear Market
First do not panic. Do not give into the urge to sell everything. The time to do that was a few months ago. You’ve already ridden the market down here. Selling only locks in your losses. Take a look at your stocks. If there are some that you no longer like as companies, or investments because of what they are, not because of their price today then now might be time to take a look at their future in your portfolio, especially if you need some capital losses to offset some capital gains.
However, what to do in your 401k or IRA in a bear market is very different.
What To Do With My 401k In a Bear Market
Most important of all, do not turn off, or lower your contributions to your 401k. Remember, this is a long-term investment. The stock market will come back. It always does. It is not different this time. It is never different. The stock market came back from the Great Depression, it came back from the Internet Bubble, it came back from the Housing Crisis and the Great Recession. It will come back from this. And when it does, all the buying that you do here will be your buy low.
Everyone knows buy low, sell high. You can’t buy without the market moving down to low. What about selling high? You missed that. Selling high was back when the market was down 5%.
Keep your monthly contributions going into your 401k or your IRA or your children’s 529 plan. Every dollar you put in down here is a dollar that buys more shares than you bought when the market was 20% higher.
When I was a financial advisor, the people that came to me when they were ready to retire and had the most money in their 401(k)s were the people who didn’t understand a thing about it. They set up 7% of their paycheck to go into the 401(k) because that is what the union guy told him to do when he started. The company matched 50% and it sat in whatever mix of funds he picked 42 years ago. His 401k was full of money. Why? He started when he was young, and he never locked in losses by selling. Instead, it just so happens that over those large cap, medium cap, small cap funds in his account were higher 42 years later. Who knew?
The people who had a lot less money in their 401ks were often the people who knew a lot about it. They tried to tweak it a lot, which resulted in them chasing last year’s winners and selling when the markets were down to “protect their money” from any further losses. Unfortunately, all they managed to do was lock in their losses, and since they didn’t have a crystal ball, they couldn’t predict when the market was going back up. Every market cycle during their lives featured a sharp, fast run-up in the stock market that left scared investors flat footed. By the time they go back in, they missed 28% returns on money they could have invested during those months and years they were scared.
There is a reason Warren Buffet says to put your money in an index fund and leave it there.
What To Do With Bonds in a Bear Market
A special note about bonds. Assuming you knew what you were doing in any way, you bought bonds in companies you believed would not go bankrupt before the bonds matured, and you liked the yield. Here is the good news. Your yield does not change no matter how far the markets go down.
You will see your bond’s price or “value” go down, but that is immaterial. The only way you can lose money on a bond that you hold to maturity is to sell it, or for the company to bankrupt. Otherwise, your bond will be worth $1,000, no matter what the stock market does.
Think of your bond investments like the equity in your house. Technically the value of your home goes up and down every day. Over long periods of time your house might be worth way less than it was when the housing market peaked. It might be worth way more than when you bought it. However, all of that is irrelevant. Until you no longer want to live in the house, you can’t sell or buy it no matter how much up or down the price goes. Treat your bonds the same way. Your plan was to collect the interest for 7 years and you won’t sell it no matter how far up or down it goes, because you are guaranteed to get $1,000 in 7 years (plus all of your interest.)
Bear Markets Happen
I think I read somewhere that the average bear market lasts three years. That being said, the average bull market is supposed to be 7 years, and this one ran a bit long, so maybe, this bear might be a little longer, or it could be shorter. There is no way to know.