A severe or prolonged period of falling prices in the share market is known as a "bear market"
Bear markets can test the mettle of even the most seasoned investor. The United States share market, for example, declined 45% over a two-year period in the early 1970s. That is a big fall for those who don’t have confidence in, and a longer-term view on, their investment strategy.
Since no one can predict the timing or magnitude of future market movements with any accuracy, the timing of the next bear market remains a mystery. It is only prudent that investors, especially those yet to experience a bear market, prepare themselves - because sooner or later another one will arrive. Surviving the highs and lows of market movements are an important part of earning a superior longer term return.
The worst bear market in share market history occurred from September 1929 through to July 1932, when share prices fell some 90% in the United States. While regulatory changes make the reoccurrence of such a dramatic decline in share prices unlikely, investors would be well served by remembering that anything is possible when considering the future.
Holding a balanced portfolio of shares, property and fixed interest, both domestic and international, can cushion the decline of any one market.
Also, the heartening news for long-term investors is that, although it can take time occasionally, the market always recovers from its declines.
Unfortunately, one of the more common mistakes made by investors during bear markets is to lose patience and sell at or near the bottom of the downturn. Many investors did just that in the 1973-74 market decline. Those who got out of shares missed a strong rebound in share prices. And it is important to note that the bulk of major market movements - both up and down - often occur over brief periods.
Prudent investors are already prepared for the next bear market - holding a balanced portfolio that reflects their investment objectives, investment horizon, risk tolerance, and financial resources.
Keeping an even keel is an important survival tip. It's human nature, at the first sign of trouble, to become nervous and want to revise your investment mix. Market downturns can cause even the heartiest of investors to have second thoughts. It pays, though, to remain focused on the long term. Remember that you're investing to achieve a long-term goal, not to avoid a short-term loss.
Make gradual shifts (if necessary) and resist the temptation to fundamentally alter your investment strategy simply because one component of your investment programme is struggling.
