Finance Basics,  Other Important Stuff

The Bear Is Here……And That’s Not Necessarily a Bad Thing

It’s been a wild ending to the longest bull market in history. Over past 11 years, the stock market returned approximately 339%. Did COVID-19 kill the bull? Or  was it the oil war thats broken out between Saudi Arabia and Russia? Could it be that  the bull just got old and died? In actually, it was probably a combination of all three things; however, COVID-19 is the primary culprit. What ever the cause, investors have been taking a bath these past few weeks. US large-cap stocks are down nearly 30% while small-cap stocks are off nearly 40%! The bull market is dead and now we are officially in a “bear market.” By the way, a bear market occurs when stocks, on average, fall at least 20% from their recent high.  For many investors, these can be upsetting times. 

COVID killed the bull?

It’s easy to see how  COVID could easily disrupt economies. Production gets interrupted in areas manufacturing goods. Workers cannot work, income falls, spending follows and local economies slip into recession. But it’s not just the immediate areas that are affected. For example, Apple, an American company,  recently warned that sales would be down because they have a shortage of products to sell. Areas of the world that are not yet unaffected slip into recession as people hunker down and wait for the inevitable. 

Cheap oil is bad?

Less clear is what is going on between Saudi Arabia and Russia. Essentially, demand for oil was falling as world economic output decreased. In turn, oil was getting less expensive.Saudi Arabia and OPEC wanted to cut production to push prices back up. Russia went in the opposite direction increasing output. Why? They want to drive prices down and hurt US shale oil companies. These companies produce oil with higher overall expenses than Russia. To punish Russia, Saudi Arabia increased oil output further dropping the price of oil. This is because Saudi Arabia can produce oil even less expensively than Russia. Less expensive oil sounds great for consumers; however, it can be economically devastating. Shale oil companies go bankrupt, major oil companies lose money and the economies of entire countries that depend on oil income are devastated. 

What should I do now?

What you should do with your investment strategy now? In a word: Nothing! If you have been investing regularly in a balanced portfolio, keep it up! This is not the time to abandon your investment strategy. If you look at your brokerage statement you may see a “loss.” The loss is only on paper, it’s not real. History alls us that if you hang on to your investments, their value will come back. If you panic and sell, only then does the loss becomes real.

Bear markets are an opportunity!

For those who have been saving regularly, a bear market is nothing but an opportunity. For those that have not been saving all along, this is the time to start! Let me explain. Let’s say we invest $200 in our 401K every month. Our 401K consists of a balanced mutual fund that sells for $50 a share. If the price stays static all year, then every month we can buy 4 shares. At the end of the year we end up with 48 shares worth $2,400 – which is exactly what we invested. But let look what happens to our investment during  and after a bear market. As prices fall, we earn more shares and when the economy recovers, the value of our investment skyrockets! 

Month Price/share shares purchased
Jan 50 4.00 4
Feb 45 4.44 8.44
March 40 5 13.44
April 40 5 18.44
May 40 5 23.44
June 45 4.44 27.88
July 45 4.44 32.32
Aug 48 4.1 36.42
Sept 50 4 40.42
Oct 50 4 44.42
Nov 50 4 48.42
Dec 50 4 52.42

In the example above our investment of $2,400 during the bear market becomes 52.42 shares worth $2,600 when the market recovers! The longer and more severe the bear market, the more shares we accumulate, and the more we earn when the market recovers. 

How long will the bear market last?

It’s impossible to know with any certainty. Since 1929 there have been 9 bear markets whose length ranged from 7 months to 6.5 years. The median is just shy of 2 years. The real problem with forecasting the length of this market is that the primary cause, COVID-19 is unprecedented. As long as the virus depresses economic activity, the stock market is unlikely to recover; however, there is every reason to believe the market will recover quickly when the pandemic is over.

Final words?

If you look at the stock market over the past one hundred years. no matter how badly stock prices fell, historically they have always bounced back and become even more valuable. This is not the time to to abandon your investment strategy. If you have been investing regularly, keep it up. If you haven’t, the bear market is an opportunity for you also! Whatever you do, don’t cash out your investments now. You may feel less wealthy if you look at your investment portfolio but remember, any loss is only paper. It’s only a real loss if you cash out your investment. A bull market is likely around the corner. If looking at your investments causes anxiety, do what I do sometimes: Don’t look!

The PocketDVM

#1 Financial Blog For Veterinarians 

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