Why do investors invariably think that it is easier to make money in a rising market than during a bear phase? In fact, most of us shy away from stocks during a downturn, even though it is sometimes possible to earn higher returns if one invests in a falling market. The reason for this is explained by human behaviour. Studies have proven that small investors generally over-react to market situations; the reactions are stronger when they lose money, as is the case during a bear phase. At some stages during both the bull and bear periods, the markets tend to become irrational.
While we scramble to buy stocks closer to the peak of a bull run, we turn our backs to the market during a bear phase. Loss aversion becomes paramount and we decide not to lose more money at any cost. In 2004, investment expert Lewis Sanders said that in most investors' minds, "losses loom larger than gains. People just don't like losing money". In effect, we would rather live with the losses in our portfolios than seize profitable initiatives. At such times, we convince ourselves that stocks are only for speculators and traders.
Couple this with another common trait. According to Sanders, most of us ignore probability "if a large pay-off is at stake". After hearing of others making profits during a bull run, many of us enter the market when it is nearing its peak as we perceive the earnings potential to be as high as 50-100% a year. This, despite the fact that the odds of a bull run continuing on its course may have fallen. Sanders compares this behaviour to "lottery ticket sales that increase as the jackpot rises, even though the likelihood of winning diminishes".
In a bear market, we decide not to invest as we don't want to extend our losses, although the odds of fantastic returns in a couple of years are higher. This is accentuated by what the experts dub as, "Inertia of regret: the regret associated with taking action is considerably greater than taking no action at all." Actually, money can be made whether the market moves up or down. To convince you, our cover package lists out investment strategies for a bear market. Read it and profit from it. But be extremely careful. Don't believe what others say; do your own research and take intelligent decisions.
