There are two main stock market viewpoints — bullish optimism and bearish concern. With both outlooks, money can be made in the market. The difference is in how investors view the economy in the near future and how money is invested.
In simplified terms, a bull market is signified by investor enthusiasm, rising stock prices and a growing economy. Bullish investors buy stock with a low price and sell high by picking stocks that are expected to grow in value and generate high profits.
A bear market is generally noted for having falling stock prices, investor pessimism and a sluggish or declining economy. Bearish investors sell high and buy low by choosing stocks that will decline significantly in value. When the stock is rebought at a discount, after being sold at a high market price, the investor keeps the difference in value, thus making money.
Currently stock prices are generally declining. If the market loses 20% or more of its overall value (as determined by one or more stock indexes) for a sustained period of time, the market is considered to be a bear market. This does not mean that there is no hope for the future and a market recovery will not happen.
Over time, the stock market will rise and fall based on various economic and investment conditions. A bear market is not permanent. A bear market can be mislabeled when major investors, who are always looking to lock in profits by selling high-value stock when the market is growing, conduct a significant selloff, which can lead to a temporary asset price downturn. As these investors repurchase stock for their portfolios, the market will again rise in value. A true bear market happens over several months, not several weeks of a downward price movement.
For investors who are currently employed and may be watching their retirement plans lose value, any losses incurred are strictly on paper. No loss is realized until the stocks in the retirement plan are liquidated. As the market recovers and regains momentum, those stocks in the portfolios will rise in value along with it and the portfolio will begin to regain much of its value.
On the other hand, for retired investors who are gradually liquidating their retirement plan, a bear market can provide significant challenges. Their portfolio losses are real losses. If a retiree is in a managed retirement plan, there are fund managers who are actively seeking ways to retain value within the portfolio and allow some growth within the objective of the fund. These managers are using short selling (selling high -alue stocks and rebuying them later when they are cheaper), using put options (locking in a guaranteed future selling price) or buying Exchange Traded Funds (which are tied to an index, not a specific stock) so that the overall portfolio value can be maintained.
In addition, if there was an ongoing contribution into the retirement plan over the course of the investor’s working years, stocks were bought through dollar cost averaging, which means that some of the portfolio’s stock were purchased while those stocks were at a low price. Losing some of the value now, does not negate the portfolio’s worth – it is merely reducing the growth that was achieved over the last couple of years.
The ongoing question is if and when the markets will rebound. Signs of a market rebound are easy to spot. When there is low unemployment, low inflation and a healthy economy stock prices will begin rising in value. However, trying to time the market to recover any lost portfolio value is not a good idea. Market volatility can be surprisingly unexpected.
If a bear market could cause you financial hardship, it may be worth your while to visit with a financial planner who can offer advice on the best ways to navigate this current trend and help you better prepare for the future, no matter the outlook.
Mary Fox Luquette, MBA, CLU, ChFC is a Finance Instructor in the BI Moody III College of Business at the University of Louisiana at Lafayette.
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