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But it is vital that all Fools remember that the only reason investing in the stock market offers the potential for better long-term returns is because it carries high short-term risk. Yes, it can be very high. This year will serve as a vivid reminder that short-term savings -- any money that might be needed in less than five years -- should not be invested in the stock market. If you're saving up to buy a house next year, or you are planning a winter holiday don't invest the money in the stock market -- stick it in a high interest instant access savings account.
Bring on the Bear!
But, if your time horizon on your savings is five years or longer, you should not be viewing the recent downturn in the price of some shares with woe. Bear markets are great for investors! No, really. If we are actually entering a bear market this will be really good for most Fools.
Why would I, a Foolish investor, be so enthusiastic, indeed grateful, if this turned into a bear market? It's because I'm a long-term buyer of shares. A true bear market will give me the opportunity to be a bargain hunter. The whole idea of investing in the stock market is that you should buy shares at one price, and then, at some dim and distant point in the future, you will sell those shares at a higher price, and in between you will have benefited from owning a share of the company in the form of dividends -- if the company pays them. So for me, a long-term accumulator of shares, a bear market is nothing more than a wonderful opportunity. As a buyer of any product, lower prices are in my interest: it is no different with shares.
You never get a bargain in a Bull market
When everything is rosy, when the stock market is booming, it is pretty unlikely that shares will be sold at bargain prices. So falling prices and a fully-fledged bear market really are in my interest, and so I welcome it with open arms -- bring on the bear!
What is a bear market? While analysts are not in complete agreement, one generally accepted definition of a bear market in stocks is a price decline of 20% from a market peak. On this basis we are not yet in a real bear market. The FTSE 100 index has fallen about 11% since its peak at the start of 2000, but who knows? This might be the real start of a great bear market -- if it is we should all be whooping and hollering with excitement.
The emotional investor
The trouble is that most investors will not have this reaction. They will let their emotions get the better if them, they will feel fear, they will see the market falling and falling. The nature of human beings is that we always believe that what we have seen happen in the recent past is likely to go on happening in the future. The UK has been under a constant rain cloud for months now, we have got used to it, we expect it to rain every day, and we will be amazed and surprised if its sunny tomorrow -- but we will still take our raincoats with us when we go out. It's the same with investors -- when the market is falling all we can ever imagine is that it will keep falling, and so the reaction of most investors is to sell.
Indeed the reaction of most private investors in a bear market is that it has confirmed their views that investing is too risky, and so to avoid any more losses they sell out and vow never, ever to invest in the stock market again -- only to be seduced back in ten years later at the height of the next bull market, just in time to be invested in during the next bear.
And finally...
What happens to the stock market on a day-to-day basis can take on a massive importance to us all. After all, it's our money and our future. However, worrying about the market's short-term movements produces nothing except perhaps some stress-induced ailment and sleepless nights. Successful long-term investors realise that you cannot achieve a nice continuously upward straight line, there will be many dips on the way. The best time to be invested and the best time to get the best and lowest prices is when other investors have no interest in investing in the stock market. The highest prices occur when investing is most popular. When do the lowest prices occur? During a bear market.
So will this "correction" turn into a fully-fledged bear market? Let's hope so!
Where Next?
• Long Term Buy and Hold -- The Rules
• Long Term -- for some
• Market Crash Survival Guide
• Three Cheers for Market Declines
• Shop around for savings