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Bull and Bear Markets

The statement that bear markets are good for profit making may seem ridiculous to many.

Under the conditions of regular investment and enough time till retirement, declining markets may provide you with opportunities that otherwise you would not be able to experience. So, next time when the prices start to go down, don't hurry to get depressed, but instead try to make the best of it.

Over the years bear markets have proven their benefits, which are observed mainly in the long term. This means that when prices start to decline investors are able to purchase stocks at lower prices than those, which are observed under a well performing market. As a result you should not panic because of the bear market, but instead continue to pour money in stocks or bonds and take the best of it. Don't become a passive observer, who only worries about his/her current investment portfolio, but instead enrich it with cheap stocks.

Comparison between a Bear Market and a Steady Bull Market

The general rule in business that after each recession a recovery follows applies also for mutual fund markets. Let's now consider the case of a bear market and a market that experiences a consistent growth. Two situations will be analyzed:

  1. You are in your retirement years
  2. You are a young investor making your first moves in the financial world

If you fall under the first category (you are in your retirement years), the case of a steady upward market will be the preferred option. This is so, since you will be able to get the highest share price possible. On the other hand, if you fall in the second category (a young investor), it will be probably better for you to start under bear market conditions. The reason for this is the fact that you will enjoy continually decreasing price and thus be able to purchase more stocks.

Let's put some numbers to make the proof more persuasive. Suppose that the starting fund price is $15 and at the end of a 10-year period we have a $35.30 fund price. Further we assume that both a young and an investor in his/her retirement invest continually the same amount. During the third quarter of the third year the price per share which the young investor pays falls to $9.07 and then begins rising again. In the given example, as a result, the bear market (with a potential recovery) will leave its investors with approximately $17.14 for a share, while the steady bull market will pay approximately $25.25 for a share.

Table 1 provides an illustration of the case of investing $1,000 every quarter.

  Number of Shares Portfolio Amount
Bull Market 1,659 $58,575
Bear Market Followed by Recovery 2,151 $75,924

Table 1

This example proves that bear markets are not the greatest evil that can happen to you. But the contrary, they present good opportunities for persistent investors to make profitable investments. During bear markets, prices are low, which means that with the same amount you can purchase far more shares than under the conditions of a bull market, when the prices are constantly rising. Always keep in mind the rule that after each recession a recovery follows. Therefore, purchases under recession will give you as return profits when the market starts to recover.

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