If we take the definition of a bear market, which is a stock market drop of at least 20% in a 12 month period, Japan, or more specifically the Topix index should in fact be considered to have entered bear territory. This is bearish news indeed, considering Japan happens to be the second largest economy in the world! What about China, where the Shenzhen index has shed close to 18% from it's peak? If the index breaks the 20% barrier would that be considered a bear market (considering that from trough to peak this year it has returned close to 176%)?
Irrespective of the debate on how to detect a bear market it has been demonstrated time and again that during periods of crisis (like the one the global markets are currently experiencing), emotions tend to override rationality. It comes as no surprise considering that our ancestors used these very behavioral attributes very effectively for survival. Employing them in investing, however, has proven to be highly destructive. Take the '87 crash as an example. The stock market correction sparked a bond market rally (similar but more pronounced than today). Most investors that held on to their stock portfolios right after the crash eventually gave up and switched their investments into bonds more or less around the time when the bond market rally peaked. What resulted was a double carnage for not only did they lose a large chunk of value from their stock holdings but, right after the switch, when stocks picked up and the bond rally ended, they experienced a further erosion of their wealth. The lessons to be learned from this is to avoid being overwhelmed by our emotions in difficult times, to stay the course by focusing on the longer term objectives and rebalance whenever necessary.
