Feb. 12--The bear market is back, ripping apart your 401(k) and perhaps disturbing your dreams for the future.
People who promised themselves they would never let their money be devastated again after the last bear market in 2008 find themselves again with losses now that stocks worldwide have gone into a bear market. That's a 20 percent decline in the MSCI All-Country World Index, which contains U.S. stocks as well as those from throughout the world.
If you have an international or global stock mutual fund in your 401(k) or IRA, it's probably behaving a lot like this index.
The losses you may see now and the bear market label can be frightening. But the label doesn't actually provide a lot of information to people trying to figure out what to do with their money. The bear label simply tells you that if you have money in stocks around the world, you probably have lost about 20 percent at this point in those investments. It doesn't guarantee that stocks will fall a lot more and leave you with worse losses. Nor does it say anything about whether stocks are about done falling and ready for a recovery.
If there's no recession, a 20 percent decline may be about the worst of the decline. On average, the U.S. stock market -- or the Dow Jones industrial average -- falls 19 percent when investors are simply rethinking what they've paid for stocks and selling them because they think they overpaid, according to research by Ned Davis Research. Currently the Dow is down only 14 percent, not as bad as the globe's decline.
But if the economy goes into a recession -- and so far the U.S. is not in recession -- people can lose 30 percent on average in a bear market that lasts on average 18 months. Since that's an average, of course, the loss can end up worse or better. Between late 2007 and early 2009, for example, the loss was 57 percent. People did recover if they kept their money in the stock market, but it took about five years.
Since recent headlines labeled the global stock market a bear, individuals have become nervous. Financial planners say they are getting an abnormally high level of calls from jittery clients.
Generally, financial planners tell people to sit tight and ride out losses while awaiting the upturn that will arrive at some point. But that doesn't mean there won't be some painful losses temporarily or that financial planners have any insight into when the pain will stop.
"We have no control over the stock market," said Northfield financial planner Edward Gjertsen.
Instead of predicting the stock market, reliable financial planners tend to remind clients that during the calm period when the client first sat down with the planner, they thought about bear markets coming up at some future time and inflicting losses. In those planning sessions, they arrived at a combination of stock and bond investments that would diminish, but not prevent losses, while giving people a chance to make money in good times. So many individuals are being told by their advisers now that "buy and hold" makes sense.
