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Hed — Rose-Colored Investing

The stock market is getting to be an increasingly uncertain even scary place. But it’s not the prospect of a 10 percent-plus correction that’s cause for concern. Corrections and occasional bear markets are the inevitable consequence of market gravity. As anyone holding technology stocks can attest to, prices don’t go up forever.

What’s far more worrisome than a downturn is the lack of one and with it, the assumption that market declines are mere respites.

Even when the Dow Jones industrial average fell by almost 10 percent in the past few weeks, Wall Street took it pretty much in stride. That might have been due to some recent cry-wolf episodes, in which stocks dropped sharply and the bears awoke only to be pushed aside by renewed buying. As of late last week, there were indications that prices had once again stabilized (at least for blue chips).

We won’t pretend to predict the market’s new course only to note, with some alarm, the cavalier attitudes of today’s traders, brokers and fund managers. They tend to be very young, very aggressive and wholly inexperienced in anything approaching a bear market.

And for good reason. It’s been almost seven years since the last bear market, touched off when Saddam Hussein invaded Kuwait. Oil prices and interest rates soared and the Dow plunged 21.2 percent in less than three months. Painful as that fall might have been, it wasn’t long-lasting; stocks recouped fairly quickly after U.S. troops moved in, and they have been on their bullish course ever since.

More than 15 years has passed since a bear market was influenced by classic business cycle conditions, such as higher interest rates and an economic slowdown. Many of the people moving tens of millions of dollars with a single key stroke were barely in grade school when the Dow fell 24.1 percent in the early ’80s.

Too often, their view of such events reveals a youthful vision of financial immortality: It can’t happen to us. This time, it’s different.

In fairness, there is something to be said for market calm in the face of plummeting prices. It’s this lack of panic that has probably helped reverse the recent falls with utmost speed (along with an economy that’s humming along at still-low inflation levels).

Eventually, however, Wall Street will experience not only a correction but a full-fledged bear market, in which prices fall 20 percent or more. And when it does happen, it won’t be just the kids on Wall Street who stand to lose, but those many millions of baby boomers, individual investors who have been plunking down their savings each month in 401(k) plans, IRAs and the like.

The issue is not so much whether to sell (conventional wisdom has it that when investing for the long-term, it’s best to ride out the storm). Rather, the point is to be aware of your holdings, of the market’s performance and of history. That way, investors at least can be prepared for whatever the market decides to do.

Sitting back and assuming that bear markets are a thing of the past is a certain recipe for disaster.