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Is the stock market making you nervous? Well, you're not alone. More than 53 percent of Americans now have a stake in the stock market either through the outright ownership of stocks or through mutual funds. Until now, more than half of those people had never seen a stock market move in any direction but up.
As the Dow Jones and NASDAQ indexes head up one day and down the next, many investors are fearful of a bear market. But a bear market-defined as a drop of 20 percent or more in the averages-is not necessarily something to dread. Seasoned investors know how to handle the bear.
• First, they never panic. They know bear markets happen. Stock averages go up and they go down. During the 20th century, bear markets appeared once every three years on average. And they didn't affect every investor. Those with properly diversified portfolios often experienced no or very minor bites from bear markets.
• Second, they don't sell indiscriminately. Most people lose money in bear markets because they hang on for a while hoping the market will turn up. Then they get discouraged and sell everything-often at the very bottom of the bear market.
• Third, they know when to seek help. When they are worried about their financial health, they seek the advice of a professional. Most financial advisors know a lot about bear markets. They will reexamine your portfolio, as well as review your investment goals, your time horizon, risk tolerance, and financial circumstances before making any recommendations.
• Fourth, some see the bear as an opportunity. Contrarian investors like to shop for bargains in bear markets. Others use dollar cost averaging to their advantage. Under this strategy, a fixed amount of money is invested at regular intervals, regardless of what the market is doing. By resolutely adding shares during a bear market, they reduce the average cost per share. The more shares they hold, the more they stand to gain when the market turns up.
An important tip is be patient. During the 20th century, the American stock market never once failed to recover from a bear market. In some cases it was just a matter of months. In other cases it took several years, but patient investors always came out ahead.
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