Have the bears taken over Wall Street? Well, they're certainly clawing at the door, the director of Champlain College's Center for Financial Literacy said Tuesday.
"Are we in a bear market? The answer is 'Maybe,'" John Pelletier said.
A bear market is defined as a 20% drop from the market peak. The S&P 500 almost got there in May, he said, going below a 20% drop before ending the day down by 19%. Pelletier prefers tracking the S&P as compared to the Dow Jones Industrial Average because it includes the nation's 500 largest companies, while the Dow Jones is based on only 30 companies.
"We're not in a technical bear market, but we're really, really close," Pelletier said.
So what should you do? That depends on a multitude of factors individual to your life, but in general, Pelletier said, don't give in to the natural human instinct to panic and run away in fear, in this case by selling. Bears do that to people, and the consequences are often not good.
"Behavioral economic studies show that we actually worry more about losing things than gains," he said. "The natural human instinct is to go to cash literally at the bottom of the market because we think it will continue to get worse."
Pelletier points out that when the S&P 500 dropped by 57% from 2007 to 2009 — the worst bear market since the Great Depression, which saw the equivalent of an 82% drop — the market had recovered those losses by March 2013.
Retiring soon? Beware the bear.
The folks Pelletier worries about most in a bear market are those close to retirement, who may not be able to wait things out.
"I would argue the biggest risk for a retiree is you retire just before a big loss and you still need a fixed amount out of your portfolio, making it hard for your portfolio to recover," Pelletier said.
In that case you may have to reduce expenses, or work longer, he said.
"The people who really need guidance are seven years from retirement through seven years after retirement," Pelletier added. "A financial advisor can help you with a strategy."
Contact Dan D’Ambrosio at 802-660-1841 or firstname.lastname@example.org. Follow him on Twitter @DanDambrosioVT. This coverage is only possible with support from our readers.
This article originally appeared on Burlington Free Press: Falling prices: Has the stock market declined into bear territory?