A Bear in Hibernation

Posted by Eric Solis on October 20, 2009 under Stock Market |

Written June 2007

A Bear in Hibernation

First let me explain the general concept of a “bull market” versus a “bear market”.  A bull market describes an overall market condition that is increasing in value and a bear market describes one that is decreasing in value. 

Over the past several years, the U.S. stock markets have experienced a bull market that has driven prices to unprecedented levels.  The Dow Jones Industrial Average has broken above 13,000 for the first time in history.  This has created a lot of excitement amongst speculators who are buying stock in hopes of raking in oversized short term gains.

The purpose of this letter is to prepare you for what will inevitably come to pass.  I am not a market timer, fortune teller or doom and gloomer.  But I am a realist and a professional with 20 years experience in the financial markets and my goal is to impart to you what I have learned.

Here is what I want you to “bare” in mind (pun intended).  The Bear will awaken and when he does he will devour those who have wandered off of the trail of good investment planning.  The timing of when the bear will awaken is anybodies guess, but rest assured he will awaken.  This means that the stock market could drop 20% or more and if you are not prepared you may be tempted to bail out and potentially lose money unnecessarily.

Be true to your vision and plans for the future and be committed to your goals.  This will produce peace and abundance and less stress and fear as the markets fluctuate.  For example, let’s say that your goal is to invest $10 a day.  If the share value of your investment is $10, you will buy one share with your $10.  If the share value drops to $8 you will buy 1.25 shares with the same $10.  Your average cost in this example is now $8.88 instead of $9.  If you keep buying as prices decline, you continually lower your average cost.  This is called Dollar Cost Averaging and it is a highly effective antidote to “Bear Markets”. 

The good news for those using the DailyIRA dollar cost averaging system is that it allows you to put money away every day that the stock market is open, .  You can start with as little as $1 and you can adjust your contributions up or down with the click of a button.

Think of it this way, seeing a bear on a hike in the woods can add to the excitement IF  you have the right equipment to defend yourself.  But if you are not prepared and have no plan to protect yourself, you are asking for trouble.  The same principle applies to investing.  So have a plan and stick to it.