The bear market of 2002 bottomed on 10/9/2002. The stock market then began to recover, gaining 15% in the subsequent 1 month period.
Despite a bad start, from July 2002 to year end 2003, the market gave you a 9.6% return, if you stayed invested.
However, if you were like the average investor, you did not put your money back in the market until things had already started to recover, and you missed out on much of the market rebound, possibly cutting your return in half.
When the market goes down, irrational decisions stem from thoughts that the market will continue to go down, until you are left with nothing. If you are invested in index mutual funds, every publicly traded company in America would have to go out of business at once for your fund value to go to zero.
If you own a diversified portfolio of index funds, you will weather bear markets well by just leaving your portfolio alone. If you own individual stocks your downside risk could be much greater as an individual stock can easily become worthless.
On the next page, we'll look at the last chart in this series, which shows how the July 2002 bear market looks in context of the next five years.
