Financials Aside, Stocks Aren't in Bad Shape

OK, SO IT'S NOW an "official" bear market. So what? So the S&P 500 has fallen 20% from its October 2007 all-time highs. That's what. That's all it means.

That's enough, I suppose. If you hold an S&P 500 index fund in your 401(k), then you've taken a big loss since October. Nothing I can say will make that sad fact go away. Nor the fact that I've been more or less bullish on stocks, and at the moment I'm looking pretty darn wrong.

Which brings up a very fundamental question that cuts to the heart of investment strategy: When you've been wrong, does that necessarily mean you should reverse your position? If you were wrong to be bullish, should you ipso facto turn bearish?

Of course not. Here's the fundamental principle involved: Investing is all about the future. It makes absolutely no difference whether you were wrong — or right, for that matter — in the past. All that matters is that you be right about the future, if you possibly can.

So when you've been wrong, it's very important to get over feeling awful about it and take a hard look at what's really happening.

Let's start by putting all this "official" bear market stuff in context.

Judging the stock market's losses against the all-time high value on Oct. 9, 2007 — as all the media accounts of the "official" bear market are doing — is quite unfair. By starting the performance clock at the highest point stocks have ever seen in all of history, it makes the subsequent drop as large as it can possibly be.

Also, the 20% drop you hear quoted all the time ignores dividends. Since the peak last October, you've earned about 1.5% in dividend yield if you held the S&P 500. Not a lot, I admit. But it is a plus-factor, yet you never hear it mentioned in the media.

Since October, there has been very wide dispersion of performance between different sectors in the stock market too. It's hard at this point to even talk about "the market" as though it's a single, monolithic entity.

For example, the financial sector has gotten absolutely killed since last October. Even including a little offset for dividends, the S&P 500 financial sector has dropped 44.6% since then, more than twice the drop of the entire market.

Unfortunately, financials were — I repeat "were" — the S&P 500's largest sector by market capitalization, so that big drop had a big effect on the overall index. If you take financial stocks out, the rest of the S&P 500 has only lost 12%, including dividends.