With the FTSE 100 having peaked at 7103 points in April of last year, a fall of 20% from that high would mean that the UK’s leading index had entered a bear market. This was reached on Wednesday of this week when the FTSE 100 fell below 5682 points for the first time since November 2012.
While disappointing for investors, the FTSE 100’s bear market did not last for very long. That’s because although the index closed on Wednesday in bear market territory, by lunchtime on Thursday it had begun a miraculous recovery which has seen it leave bear market territory firmly in its wake.
As such, the bear market which has been feared for so many weeks came and went within a matter of hours. Clearly, there is scope for the FTSE 100 to again fall in the short term, but in the long run the bulls are likely to overcome the bears.
A key reason for this is that every bear market in history has never lasted forever. In other words, where the FTSE 100 has fallen by 20% or more from its high, it has always mounted a successful comeback. Sometimes this has taken a day, as was the case last week, and other times it has taken a handful of years, as was the case after the dot.com bubble burst in 2000. However, one constant has been evident: the bulls have always kicked out the bears and long term investors have been handsomely rewarded.
Clearly, for those investors who are now retiring and considering the purchase of an annuity or other means of accessing their hard-earned retirement fund, a bear market or major correction is bad news since it means a lower potential income in retirement. However, for the majority of long term investors, a bear market is great news since it provides an opportunity to lock-in capital gains which, although not guaranteed, have always been delivered in the past. And by sticking to high quality companies which offer bright future prospects, it is possible to enhance your net worth and long term financial outlook during low ebbs in the FTSE 100’s price level.
Undoubtedly, buying during bear markets takes a leap of faith. It feels almost unnatural to buy when share prices are falling and it feels as though things will get worse before they get better. Tuning in to various media outlets only makes things worse since bear markets are often hyped up and turned into threats rather than the opportunities that they in fact are. However, by focusing on the facts and figures rather than the fear and the panic, it is possible to become contrarian and buy high quality stocks at discounted prices.
Certainly, buying during bear markets is not particularly fun – especially when just a few hours later you could have bought the same shares for 5% or 10% less than the price you paid for them. However, by doing so you are setting yourself up nicely for the next bull market.