subject: Bear Markets Come Back And Go: Is A New One Coming...or Is It Here? [print this page] Bear markets have a nasty habit of occurrence every four years or so.
Like unwanted relatives, they show up whether we have a tendency to need them to or not.
They additionally have the nasty habit of getting rid of the punch bowl. And simply when everyone is prepared for a nice sip of that wonderful nectar. It doesn't seem fair and several people marvel why.
But listen up...fairness has nothing to do with the market.
Bear markets have a very definite purpose. They clear up the excesses that have developed since the last bear market. It's quite like when we indulge ourselves over a period of months and, lo and behold, we tend to wake up one morning twenty pounds overweight.
We have a tendency to have to go on a diet or buy a bunch of new clothes. Bear markets are the market's way of putting us on a diet.
Most people do not like them however they're a reality of life.
Therefore where do we tend to stand currently?
The market has been a little wobbly recently and you hear some people starting to use the b word...as in bear. It makes you wonder what the market is telling us. Is this weakness a traditional correction or is the market telling us something else?
Let's have a look at the evidence and see what we tend to will create of it.
Bear markets are definitely an ongoing reality and occur with some regularity. Of course, throughout the last a hundred years there are 19 bear markets. And, for our purposes, I am defining a bear market as a decline of twenty% or additional in the Dow Jones Industrials.
Reviewing these nineteen bear markets reveals some attention-grabbing facts...
? The common time from the top of one bear market to the start of the following is 45.three months.
? The typical length of a bear market is 18.5 months.
? The average bear market results in a decline of thirty six%.
While this can be valuable info, remember that these are only averages. The individual bear markets varied widely in length of your time and severity of decline.
For example, the longest bear markets lasted concerning three years. Specifically, they lasted thirty one, 34, and thirty seven months for the bear markets ending in 1942, 1932, and 1949 respectively.
The shortest bear market lasted two months. This was the crash in 1987 when the Dow Jones Industrials plunged thirty six%.
If you're wondering concerning the most severe bear market, you probably know the answer. Yep...it is the one associated with the beginning of the great depression...it led to 1932. But this was solely when it had sheared eighty nine% off the price of the Dow.
And therefore the mildest bear market? The three month affair that ended in October, 1990 that took twenty one% off the Dow.
Now...these are all attention-grabbing facts...however the query is...are they useful in analyzing the current market?
And the solution is yes. However they are only part of the process.
They are helpful in that they provides us some parameters to consider. But they are only that...parameters. An actual determination of a bear market may take many months.
However, with that in mind, here's what the averages tell us...
? forty five months from the top of the last bear market in October, 2002 is July, 2006.
? If the market high of eleven,670 on Could ten was a market high, a mean decline of 36% will take the market all the way down to around seven,470.
? If the market high was Could, 2006, the common bear market length of 18 months can end in November, 2007.
Am I saying a bear market is here and prepared to unfold according to these averages? After all not. I'm not even saying the market top is in.
This is solely to point out certain facts connected to bear markets in what looks to be turbulent economic times. That, plus the fact, that, historically speaking, this current bull market might be getting long within the tooth.
But, one fact is perfectly clear. History tells us that a bear market can occur again.
And, sadly, after they do occur, they strike concern into the hearts of investors. Folks who purchase and hold are never ready for bear markets. As a result of of their get and hold mentality, many investors try to ride them out.
It's often not a reasonably picture to sustain losses of 20%, thirty%, or more in one's portfolio.
Traders, but, are different. They do not concern bear markets. They read them as another chance to create money.
Of course, money is usually made quicker in bear markets. Markets typically go down faster than they go up. Yeah...traders don't fear bear markets...they get pleasure from creating cash faster. And that they trade them like all market...with their trading system and cash/risk management.
So, is a bear market at hand? No one knows.
But, there are signs to seem for...
? The market declines below its 200 day moving average.
? If it is not a steep decline initially, the market could trade around the 200 day moving average for a while.
? Declines are larger and last longer than previous corrections.
? Sharp rallies occur however they fail to create new highs.
? Rummage around for a long term Elliott Wave count...five waves up to the recent high.
? The market starts making new lows.
These are some of the items you'll likely see once the market tops out and begins rolling over into a bear market.
But, it could take a while before you know for sure. It's like everything else associated with the market. There are not any certainties...only probabilities.
But we tend to grasp one factor may be a near certainty. There can be another bear market. We tend to simply don't apprehend when.
However, it never hurts to look ahead. When a bear market starts, a lot of quick profits can be there for the taking.
I decided to start the Investing Options Series by highlighting Money Market Funds. There's really no rhyme or reason behind it except that the subsequent installment will be about Money Market Accounts and highlighting the distinction between the 2 savings options.
What Are They?
A Cash Market Fund (to not be confused with a Money Market Deposit Account) could be a kind of mutual fund that maintains its value by getting short-term investments (maturing in less than one year) like Treasury bills, short-term certificates of deposit (CDs), and short-term industrial debt. Money Market Funds are required by law to produce a secure and liquid investment whereas at the same time providing returns slightly beyond a run-of-the-mill passbook savings account. Cash Market Funds are becoming increasingly common and additional widely out there every year. Even PayPal incorporates a Cash Market Fund! Of course, at the tip of 2003, cash market mutual funds had nearly $2.three trillion in assets, or thirty six% of the $6.thirty-nine trillion invested in all mutual funds, in step with the Investment Company Institute (ICI), an trade cluster that represents mutual fund companies.
What is the Investment Strategy?
As mentioned above, Money Market Funds' main strategy is to preserve your invested principal by keeping the web asset worth (NAV or share worth) around $1. Although Money Market Funds aren't insured by the FDIC, no retailer has ever lost money in a Money Market Fund - which has created Cash Market Funds infamous for low-risk investing. After all, there has been simply one case of a money market fund "breaking-the-buck," or dropping below its $1.00 share price. In 1994 an institutional money fund, Community Bankers U.S. Government Money Market Fund, liquidated at 94 cents a share because of extensive derivatives-connected holdings.
Completely different Flavors
There are a number of various Money Market Funds mainly primarily based on the type of short-term investments that are used furthermore the quantity of the fund that is used to invest in "illiquid" assets in order to strive and earn a bigger dividend. There are portfolios, for example, that solely invest in T-bills or only invest in CDs and there are even state-specific portfolios. The type of underlying investment would possibly not appear terribly vital, but it impacts the yield percentage as well as the taxability of the fund.
Taxable Money Market Funds invest in securities whose income is not exempt from federal income taxes, as well as funds that invest principally in Treasury securities. Tax-exempt money market funds invest briefly-term securities whose income is exempt from federal income taxes, such as bonds issued by state governments and municipalities. The yield on tax-free funds is generally under the yield on taxable fund which suggests that that those in upper-income tax brackets will benefit the foremost from those tax-free funds. If you're pondering a tax-free fund take a peek at your tax bracket, the state your in, and monitor the yields that are often additional volatile in the tax-free funds.
In order to calculate the taxable-equivalent yield:
1. Subtract your federal income tax rate from 100. As an example, if you are in the twenty five% income tax bracket, the difference is 75. This figure is additionally known as your reciprocal-of-tax-bracket.
2. Divide the tax-exempt fund's yield by your reciprocal-of-tax-bracket. If the yield on a tax-exempt fund is 1.8% and your reciprocal-of-tax-bracket is 75, the taxable-equivalent yield is 2.four%.
In alternative words, you'd must earn a yield of at least 2.4% on a taxable cash market fund to create the taxable fund additional attractive than the tax-exempt fund.
If your tax-exempt fund is additionally exempt from state income taxes, subtract your combined income tax rate from 100. For example, if your federal and state income tax rates sum up to forty% of income, your combined reciprocal-of-tax-bracket is 60.
Using the same formula, a 1.8% yield on this tax-exempt fund incorporates a combined taxable-equivalent yield of three%.
Short or Long-Term Investment?
Undoubtedly short-term! Money Market Funds are designed to be highly liquid - meaning that you may money out in a very matter of days. After all, several investment firms permit you to write down checks from your Money Market Fund or withdraw money from an ATM.
Potential Risk
Since Money Market Funds are managed in such a means as to reduce risk, the most important risk concerned in investing in Money Market Funds is the danger that inflation can outpace the funds' returns, thereby eroding the getting power of the investor's money. Fidelity conjointly mentions that the worth of a Money Market Fund could decrease due to a decline within the credit quality of an issuer (i.e. The U.S. Government will not honor T-bills). And, as mentioned previously, a Cash Market Fund is not a deposit at a bank and is thus not insured by the FDIC.
Potential Return
Cash market funds have a median come back of 4 to six p.c a year - rivaling your savings account and even most short-term CDs. PayPal's Cash Market Fund, that they claim is that the country's highest yielding, had a 7-day average yield of 4.73% as of the date of this post. The interest of a Cash Market Fund is calculated daily, however solely paid out at the tip of the month unless you sell the fund, then it's paid at that time. The graph below shows an example of returns from the PayPal Cash Market Fund that sweeps the leftover PayPal funds of investors into a larger Money Market Fund.
These returns will be compared to the U.S. Treasury bill come over the past few years:
BankRate.com provides current Money Market Fund yields along with graphs like this one showing the yield comparison of the various flavors of Cash Market Funds.
Who is that this a Smart Investment For?
In brief, Cash Market Funds are great for people looking for a safe and liquid short-term investment. Money market mutual funds are often employed by individuals with brokerage accounts as a brief-term holding place for money that's waiting to be invested in stocks, bonds or mutual funds. But, you must remember of the expense ratio thus that your interest revenue isn't swept aloof from your brokerage firm.
If you're looking to speculate some cash for the short-term, Cash Market Funds are an on the market choice - but they're not the best possibility for most individual investors mainly due to the very fact that alternative investment vehicles (CDs and Cash Market Accounts) offer the identical liquidity and safety whereas providing higher returns.
