It has been almost six years since the last bear market. The current bull market began its run in March 2009 and is one of the longest since the Great Depression.

The Standard & Poor’s 500 index saw 53 record breaking closes in 2014 and finished the year up 11% at 2,058.90. The Dow Jones Industrial Average, meanwhile, for the first time rose above 18,000, gained 7.52% and saw 38 record closing highs in 2014.

No End in Sight

For the short term, at least, it appears the bull market run will continue. Financial professionals, including analysts, traders and fund managers, continue to be optimistic about the markets in 2015 although they expect lower returns and more volatility. (For more, see: How Advisors Can Help Clients Stomach Volatility.)

BofA Merrill Lynch, in its 2015 Market Outlook, forecasts a bull market in global equities continuing but returns slowing to single digits. “While our key measures suggest that the bull market in equities can continue, the sentiment is far from euphoric,” said Candace Browning, head of BofA Merrill Lynch Global Research.

The forecast maintains that robust U.S. economic growth continues to outpace the rest of the world, boding well for U.S. employment, wages and housing in 2015. It also cautions that in the second half of 2015, the U.S. Federal Reserve will begin slowly hiking interest rates and investors can anticipate three key changes: lower liquidity, wider credit spreads and higher volatility.

While there may be no end in sight for the bull market run in the short term now is a good time to prepare investors for a bear market when indeed it comes. In fact there is never a bad time for financial advisors to prepare clients for a bear market. (For more, see: Protecting Retirement Money from Market Volatility.)

It’s Psychological

Preparing investors for a bear market is an exercise in psychology. Financial advisors must mitigate the emotions that drive investors to make bad financial decisions. Emotions often lead to following the herd and knee-jerk reactions when panic kicks in, which can result in selling low when markets fall. (For more, see: How to Avoid Emotional Investing.)

It's also important for advisors to take into account a client’s risk tolerance and past reactions to market downturns when preparing them psychologically for a bear market. (For more, see: Is Your Psyche Ready for a Bull Market?)

Is Education Futile?

Education has always been touted as key in helping investors make good investment choices. But does it work? Not according to according to Boston-based financial services research firm Dalbar. Its annual Quantitative Analysis of Investor Behavior report found that over the last 30 years investors investing in U.S. equity funds earned an average annual return of 3.69% compared with the Standard & Poor’s 500’s 11.11% return, a 7.42% gap.

The major cause of investors’ poor returns has been selling low and buying high, according to Dalbar. "Attempts to correct irrational investor behavior through education have proved to be futile. The belief that investors will make prudent decisions after education and disclosure has been totally discredited,” the study maintains. “Instead of teaching, financial professionals should look to implement practices that influence the investor's focus and expectations in ways that lead to a more prudent investment decisions."

Dalbar recommends setting appropriate expectations, managing exposure to risk, monitoring risk tolerance and presenting forecasts in terms of probabilities. (For more, see: Determining a Client's Risk Tolerance.)

Staying the Course

When the markets do eventually transform from bull to bear financial advisors will need to keep clients focused on their long term goals and reassure them that historically speaking it is normal for the markets to have down years also. (For more, see: How to Get Ready for the Next Bear Market.)

There is no sure way to predict when the next bear market will begin not to mention that each bear market is different. As a result it is important for investors to understand that attempting to time the market is futile.

Instead generally speaking they should stay the course when the markets take a turn for the worse. This is especially true for long-term investors or those with at least a five-year investment horizon. Said investors should have a well-diversified portfolio, which also includes investments not correlated to stocks, such as investment grade bonds, and real estate investment trusts, which help mitigate risk. (For more, see: The Importance of Diversification.)

The Bottom Line

While there appears be no end in sight for the bull market run in the short term, now is the time for financial advisors to prepare investors for a bear market. Key to preparing them is managing their emotions, which can get in the way of making good financial decisions. (For more, see: 8 Ways to Survive a Market Downturn.)


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