The benefits of a bear market

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Rick Ferri
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The benefits of a bear market

Postby Rick Ferri » Mon Mar 17, 2008 9:36 am

This is a positive post.

I started a list below of the benefits of a bear market in stocks. Why am I doing this? To raise optimism, or rather, to remind people that the world is not ending and that this current financial crisis will pass. There are so many doom and gloom conversations being started on this forum that I felt the need to look past the short-term and reiterate the fact that all bear markets eventually end - and this one will too.

Here is a start. The benefits of a bear market are:

1) You can buy much more stock for the same dollar invested.
2) You learn what your true risk tolerance is.
3) More media attention on the markets means less media attention on the election.
4) Lower interest rates helps people buying homes or refinancing.

Please add your own POSITIVE thoughts on the markets or on the economy. Pessimists, please do not post. You have have plenty of doom and gloom conversations to post negativism.

Rick Ferri

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Hondo
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Postby Hondo » Mon Mar 17, 2008 9:44 am

Bear markets help you to understand and appreciate asset allocation.

learning
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Postby learning » Mon Mar 17, 2008 9:50 am

Another positive of a bear market:

When it ends, we're reminded, once again, that when doom and gloomers shout "this time it's different" -- it really isn't.

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gummy
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Postby gummy » Mon Mar 17, 2008 9:57 am

Things could be worser, eh?

Image

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ddb
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Re: The benefits of a bear market

Postby ddb » Mon Mar 17, 2008 10:02 am

A bear market makes you appreciate high-quality short-term bonds, and reminds you that you probably shouldn't take on credit risk in your fixed income holdings.

A bear market greatly reduces the posts on this board asking about allocations to emerging markets, small-cap value, etc. (i.e. it quiets down the performance chasers).

A break market gives us a video like this (warning: explicit language).

- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB

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NoMoreInvestingExcitement
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Re: The benefits of a bear market

Postby NoMoreInvestingExcitement » Mon Mar 17, 2008 10:07 am

Hi Rick:

Thanks for your optimistic list. In general I quite agree with you, at least for folks in the accumulation phase of their investing lives. Not sure you could convince a less-than-well-heeled retiree that a bear market is good for her, though.

Anyway, my further two cents:

RickFerri wrote:1) You can buy much more stock for the same dollar invested.


That's for certain. If you're in the position to sink some $ into equities then buying low definitely beats buying high, as long as you have the stomach for it. And speaking of tolerance...


RickFerri wrote:2) You learn what your true risk tolerance is.


Again, right on the money. As for me, I know my risk tolerance has been tested before so I know what I can take and what I can't. But for those who've never been there, there's no substitute for getting a true taste of a down market (changes those handy dandy risk tolerance questionnaires from purely hypothetical to something a bit closer to reality).


RickFerri wrote:3) More media attention on the markets means less media attention on the election.


Definitely in the short run, at least. Of course, it's bound to change the focus of the election, too. So, now when we see the candidates they'll be telling us this, that and the other thing about the economy and the financial markets, etc., instead of focusing on the many other issues out there that bear (pardon the pun) on the election.


RickFerri wrote:4) Lower interest rates helps people buying homes or refinancing.


You sure know more about this stuff than me, and I'd suppose without researching it, that it'd be true in a "normal" bear market. But, geez, I've been looking into refinancing for several months, and just when I thought mortgage rates would decline ... uh, no, they are rising. From the man on the street perspective, mortgage rates are pretty much SNAFU right now.

On the whole, however, I side with your larger point ... "this, too, shall pass."
Unlimited online financial info's great, but I'd rather my compass just kept working.

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G12
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Postby G12 » Mon Mar 17, 2008 10:08 am

A bear market gives an equity investor who holds cash in their AA opportunities to buy cheaper stock without selling bonds or other investments. Low interest earnings are a small price to pay for this future opportunity.

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Robert T
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Postby Robert T » Mon Mar 17, 2008 10:09 am

.
Four more…

The benefits of a bear market are…

1) …you can tax-loss harvest to improve future tax efficiency
2) …a first hand demonstration of which asset classes provide the best hedge for these types of market conditions
3) …a clear demonstration that smart people can often get it badly wrong
4) …opportunities to shift into ‘better’ investment products at lower cost (lower costs basis).

Robert
.

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PiperWarrior
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Postby PiperWarrior » Mon Mar 17, 2008 10:09 am

Here is another one: Tax loss harvesting.

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Ria Rhodes
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Postby Ria Rhodes » Mon Mar 17, 2008 10:09 am

..pushes more people to shop at Costco and WalMart of which I am a long term investor.

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Postby sschullo » Mon Mar 17, 2008 10:11 am

Rick,
I have a slightly different approach, it’s more personal rather than market driven:
1. Reassess employment opportunities, went back to school learned more skills and credentials to get promoted.
2. Worked a little longer and harder, took employment risks to earn more money and actually do what I love.
3. Reaffirmed my values of massive self discipline, stay the course, not panicking.
4. Acknowledging that only mistake I made was not diversifying and painfully learning from that one mistake that cost us big time.
5. Humbling acceptance that BALANCE in one’s life and the life of a country is good for long term grow and prosperity.

BTW, Interest rates for home buyers have actually went up slightly according to news reports. Of course, who believes the news?

Steve

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Postby Joe S » Mon Mar 17, 2008 10:12 am

Corrections are good. Bear markets, hmmm. It all depends on the time frame.
You mean like the Great Depression? Or the 1970s?
Yeah, those were the days.

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Postby billern » Mon Mar 17, 2008 10:13 am

bear markets keep the equity risk premium high. :D

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DRiP Guy
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Postby DRiP Guy » Mon Mar 17, 2008 11:01 am

Shakes out weak hands and speculators. Nature's way of doing a little economic system pruning, which helps long term healthy growth.

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Postby ken250 » Mon Mar 17, 2008 11:09 am

Maybe a slight variation on what's already been posted...

When the market hits a patch rough enough to generate the concern, fear, doubt, etc. that the current market is, valuations can get fuzzy...this revives the value premium.

Yes! 8)

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Postby Levett » Mon Mar 17, 2008 11:19 am

Don't know whether any retirees have yet to respond to Rick.

As a retiree, this market downturn (which, by the way, remains a blip compared to others I've experienced) has not affected our lifestyle in any way. There's just nothing like the predictability and reliability of annuity income together with all the other bells & whistles that make up an asset allocation plan.

Never underestimate safe sources of income. Bob U.

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Sbashore
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Postby Sbashore » Mon Mar 17, 2008 11:24 am

Bear markets lower valuations, thus boosting future long term returns. Actually I was getting tired of my portfolio being in a narrow range of value. Now as it declines, I see things starting to move out of that range, so I know that the future holds a higher value portfolio for me.
Steve | Semper Fi

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Postby pkcrafter » Mon Mar 17, 2008 11:32 am

dripguy wrote:
Nature's way of doing a little economic system pruning, which helps long term healthy growth.


Market's way of saying booga-booga.

Bob U. wrote:
Never underestimate safe sources of income
.

Never underestimate the power of risk. A market like this defines risk.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Postby Easy Rhino » Mon Mar 17, 2008 11:36 am

I'm looking forward to the opportunity to simultaneously tax-loss harvest AND fix up my asset allocation in my taxable account.

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Postby retiredjg » Mon Mar 17, 2008 11:57 am

Thanks, folks, for the tilt back to the positive side. And thanks to Rick for getting it started. jg

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DRiP Guy
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Postby DRiP Guy » Mon Mar 17, 2008 12:02 pm

Teaches flippers that homes are to live in, not to arbitrage by the dozen using other people's money.

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Postby InvestingMom » Mon Mar 17, 2008 12:04 pm

Yin and the Yang.

But seriously, it reminds us to appreciate it when times are good (and when you think about it, times are not so bad anyway...from a financial perspective...if you have done your asset allocation homework correctly.)

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Postby Joe S » Mon Mar 17, 2008 12:04 pm

Optimists?
Pessimists?
Silly language.
How about realists?
Despite all the historical "scientific" studies and simulations, no one knows what will happen to the long-term economy as a whole, because we are, as is sometimes the case, in uncharted waters.
Though maybe you'd like to ask those losing their job or house if it's really such great news.
If being risk-averse is "pessimism", count me in. Based on political and economic realties, I figured this was coming, and starting in early 2001, put about half of my stock holdings into the Vanguard total international fund, then the rest to domestic indexes and stocks with a heavy tilt to oil and defense. I didn't guess perfectly, but it has done OK - so far.
I'm now invested 25% in the market, 75% in bonds and cash, with sufficient capital for retirement and SS, so it may be no big deal to me. (The wisest advice you can get is Swedroe's: Take no more risk than you have to. So I should probably be out of the market even more.)
Last edited by Joe S on Mon Mar 17, 2008 12:26 pm, edited 1 time in total.

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Postby Blackhawkzone » Mon Mar 17, 2008 12:05 pm

6) money can be made on the short side thanks to inverse style etf's.

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Taylor Larimore
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No refuge in stock diversification

Postby Taylor Larimore » Mon Mar 17, 2008 12:29 pm

Hi Rick:

Today's Wall Street Journal lists the 1 year return for various Dow Jones Wilshire indexes.

+07.4% Total Bond Market

-03.2% Growth
-06.6% Large Caps
-07.6% Total Stock Market
-09.3% Mid-Cap
-10.9% Large Cap Value
-11.4% Value
-12.2% Small Cap
-15.2% Small-Cap Value
-22.1% Micro Cap

Another benefit: We learn that stock diversification does not protect against stock market declines (it can actually hurt). Bonds and cash are the best protectors.

Best wishes.
Taylor

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BigD53
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Postby BigD53 » Mon Mar 17, 2008 12:29 pm

My Vanguard Target Retirement Income fund is down, what, 1.5%? Maybe 2%? :beer

No worries here, mate! I planned ahead. I knew going in, that my tolerance for risk was lower than a snakes' belly! :)

I have much more bonds than I do stocks. So, I may have to work 'till I'm 70. But things could be much worse. :wink:

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Re: No refuge in stock diversification

Postby Opponent Process » Mon Mar 17, 2008 12:44 pm

Taylor Larimore wrote:Hi Rick:

Today's Wall Street Journal lists the 1 year return for various Dow Jones Wilshire indexes.

+07.4% Total Bond Market

-03.2% Growth
-06.6% Large Caps
-07.6% Total Stock Market
-09.3% Mid-Cap
-10.9% Large Cap Value
-11.4% Value
-12.2% Small Cap
-15.2% Small-Cap Value
-22.1% Micro Cap

Another benefit: We learn that stock diversification does not protect against stock market declines (it can actually hurt). Bonds and cash are the best protectors.

Best wishes.
Taylor


the good old fashion stock/bond allocation decision is the most important by far.

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Postby vb » Mon Mar 17, 2008 12:45 pm

Some of my own personal goods from the last bear market...

1. Instead of dining out, had potluck get-togethers & bonded with friends through it
2. Appreciated the value of a bagged lunch
3. Instead of going out, stayed in and played old-fashioned board games
4. Reassessed my job, my career, my life
5. Made longer-term goals - applied for a masters degree program and just completed it, along with a career change; started playing tennis, won my first singles tournaments last year
6. Just learned more about investments, as the excesses were worked out
7. Worked out my own non-financial excesses
8. Enjoyed the weather and everytyhing else that is free

I was 25 when the last bear market hit.

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Postby hamishdad » Mon Mar 17, 2008 12:47 pm

Bear markets give people the will to live long enough to get their money back.

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Opponent Process
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Postby Opponent Process » Mon Mar 17, 2008 1:02 pm

given the choice between bear market now vs. next year or next decade, we should take it now. the sooner, the better; a mathematical fact.

if you're in retirement, you're enjoying some nice bond returns.

so the system works, as long as you start early.

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Postby Unormal » Mon Mar 17, 2008 1:07 pm

gummy wrote:Things could be worser, eh?

Image


Man, I love Gummy.

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gbs
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Postby gbs » Mon Mar 17, 2008 1:22 pm

A bear market enhances the value on an unexpected payroll increase :) !

gbs

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Postby unclemick » Mon Mar 17, 2008 1:28 pm

:lol: :lol: :lol:

Fair winds or foul - the Norwegian widow always knows her current portfolio yield.

heh heh heh - :wink:

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Postby FinanceGeek » Mon Mar 17, 2008 1:36 pm

Exiting 2008 I'll have done enough tax loss harvesting to not pay capital gains tax for many many years to come...

So how does one arrange to reclassify more "ordinary" income into capital gains to offset these? :-)

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Postby grumel » Mon Mar 17, 2008 2:09 pm

- less time spent on trying sucesless to talk people out of ridiculous asset alocations like 70% china funds

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market timer
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Postby market timer » Mon Mar 17, 2008 2:12 pm

FinanceGeek wrote:So how does one arrange to reclassify more "ordinary" income into capital gains to offset these? :-)


You could work in private equity until the tax law is changed. I'm curious to know if there are any other feasible options.

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bob90245
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Postby bob90245 » Mon Mar 17, 2008 2:17 pm

Another benefit of a bear market:

If you've had your eye on buying a great mutual fund, but disappointed that it had closed its doors to new investors, chances are that it will soon reopen during this market decline as investors pull their money out in fear.

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Postby jh » Mon Mar 17, 2008 2:31 pm

...
Last edited by jh on Sat Mar 29, 2008 2:27 pm, edited 1 time in total.

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Postby Rodc » Mon Mar 17, 2008 2:35 pm

Misery loves company; you have lots of people to commiserate with. :)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Postby jh » Mon Mar 17, 2008 2:40 pm

...
Last edited by jh on Sat Mar 29, 2008 2:27 pm, edited 1 time in total.

matt
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Postby matt » Mon Mar 17, 2008 2:41 pm

You can laugh at the perma-bulls who said the good times would never end.

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haban01
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Thanks, Rick

Postby haban01 » Mon Mar 17, 2008 3:00 pm

1.) First priority is to pick up more shares on the cheap side! Continue to invest through good and bad markets!!

This is actually my first "Bear Market" where I have some "skin" in the game, so to speak. I had a portfolio worth an once or two of gold back then!! This is great for the young investors that have started within the past 5 years!!

2.) Stay the Course, Don't just do something, Stand There!! (Jack Bogle


Best Wishes to all! This too shall pass!! :shock:
Eric Haban | | "Stay the Course" | "Press on Regardless" | | Wisconsin Bogleheads Chapter Coordinator

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SpringMan
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Postby SpringMan » Mon Mar 17, 2008 3:35 pm

Bear markets build character.
What doesn't kill you makes you stronger.
You can't buy back your youth when you are old.

Happy St. Patrick's day
Best Wishes, SpringMan

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DRiP Guy
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Postby DRiP Guy » Mon Mar 17, 2008 3:43 pm

Proves the sagacity (or lack thereof) of Market Analysts:

As of March 13, the day before Bear revealed its stricken state, among 15 analysts surveyed by StarMine Corp, a unit of Reuters, five rated Bear "buy" or the equivalent, while 10 rated it "hold." None rated it "sell."

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Random Musings
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Postby Random Musings » Mon Mar 17, 2008 4:03 pm

Bear markets can cleanse excess speculation.

Bear markets are great for young people in the accumulation phase.

Bear markets make one respect what risk is all about.

RM

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Postby PatrickS » Mon Mar 17, 2008 4:06 pm

jh wrote:You won't need to pay any taxes on your gains because you won't have any. :lol:


I know this was a joke, but it has some actual validity. Case in point-

I can now sell shares of my (taxable account) small cap index and transfer to the tax-managed small cap index with less capital gains taxes to pay.

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rpike
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Hmm...

Postby rpike » Mon Mar 17, 2008 4:15 pm

Now I can convert more shares of my Traditional IRA to Roth for the same amount of taxes.

Another Rick

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SpringMan
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Postby SpringMan » Mon Mar 17, 2008 4:16 pm

PatrickS wrote:
jh wrote:You won't need to pay any taxes on your gains because you won't have any. :lol:


I know this was a joke, but it has some actual validity. Case in point-

I can now sell shares of my (taxable account) small cap index and transfer to the tax-managed small cap index with less capital gains taxes to pay.

This is true regarding selling a fund at a loss but funds can and do distribute taxable capital gains and dividends even if they drop in value.

Best wishes,
Best Wishes, SpringMan

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Postby sschullo » Mon Mar 17, 2008 4:23 pm

Bear markets make immature investors (active, performance chasing, following and purchasing high priced newsletters and watching Jim Cramer and other Wall Street mucky mucks) into seasoned investors.

Bear markets make you feel the pain of your mistakes, make corrective actions and help you learn that you the only one responsible for your decisions. Pain that was a result of your mistakes, eventually turns into wisdom. It doesn't happen any other way. There are no shortcuts. You have to experience this through a bonified bear market.

In the short term, it is terrible, horrific experience, but if you keep at it by reading, talking to people and learning more, the terrible times turn into the greatest benefit of all---Wisdom and perhaps a little more money the next time around.
Steve

Trev H
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I smell a come back !

Postby Trev H » Mon Mar 17, 2008 4:43 pm

Small Value outperformed the Market 5 years in a row after the 73-74 Bear ended.

Small Value outperformed the Market 4 years in a row after the 2000-2002 Bear ended.

Maintaining my SV Tilt ;-)

Trev H


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