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Know Your Bear Markets

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Bear markets and market corrections can play havoc with your portfolio. Armed with information about how bear markets come about, you will be better prepared to deal with the consequences.
This chapter is from the book

This chapter is from the book

Knowing your enemy is half the battle. In a television commercial, basketball legend Bill Russell does a monologue about how he was so successful as a rebounder. He says that he knew every player's strengths and weaknesses; what they do in certain situations; what they are thinking before they shoot the ball. Russell concludes by saying he got most of his rebounds before the opponent even shot the ball.

Knowing your enemy is no less important in investing. Bear markets and market corrections can play havoc with your portfolio. Armed with information about how bear markets come about, you will be better prepared to deal with the consequences.

This chapter examines the different varieties of bear markets and how they affect your investments. In Part 3, "Bear Assets," we will look at these strategies in detail.

Bear Market Types

In previous chapters, we looked at some of the causes of bear markets and some of the risks associated with investing in general. It is important to remember that often (maybe always) more than one factor causes bear markets. Sometimes a primary cause and contributing factors make the bear market particularly bad.

One chilling prospect is that we may be on the verge of seeing an entirely different type of bear market, one driven by large numbers of individual investors moving in concert thanks to the Internet.

In this chapter, we will look at the following types of bear markets, which I created for the purpose of explanation. These distinctions are arbitrary and there is not universal agreement about the causes of bear markets. It doesn't matter what you call them; the important thing is to see them coming.

  • Political/financial-instability bear markets
  • Market-liquidity bear markets
  • Recession bear markets
  • Inflation/interest-rate bear markets
  • Deflation bear markets
  • Information bear markets

Remember my caution from earlier: The closer you are to your financial goal (retirement, in particular), the more concerned you should be about bear markets and the more carefully you should watch the markets and the economy. A good financial advisor will help you watch for warning signs.

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