Many investors get terrified when they hear the phrase “bear market.” But these severe market declines are inevitable and frequently quite brief, especially when you compare them to the duration of bull markets, in which the market’s value rises. Even bear markets might present favorable investing opportunities.
Read on to learn what a bear market is, and what you can do to sustain your investments till the market becomes bull.
Bear market Definition
A bear market is characterized by a sustained decline in investment prices. Typically 20 percent or more from the most recent high.
While 20 percent is the threshold, bear markets typically decline significantly more than that over time, not all at once. Despite periodic “relief rallies,” the market’s general tendency is negative. Eventually, investors find stock prices to be appealing and begin purchasing, thus ending the bear market.
Bear markets cause pessimism and a lack of confidence in investors. During a bear market, investors often appear to disregard any positive news and continue to sell aggressively, driving prices lower.
Although investors may be bearish on a certain stock, this attitude may not impact the market as a whole. However, when the market goes bearish, nearly all equities inside it begin to decrease.
What causes a bear market and how long does it last?
A bear market typically comes just before or after an economic recession.
Investors closely monitor hiring, wage growth, inflation, and interest rates to determine when the economy is weakening. Some of the signs for the COVID-19 pandemic were a little different. Widespread closures, surges in jobless claims, and social isolationism were a few indicators that the economy was headed for crisis.
When investors observe a contracting economy, they anticipate a near-term drop in business profits. Therefore, they sell stocks, bringing the market down. A bear market may portend increased unemployment and harder economic conditions in the future.
Bear markets are typically shorter than bull markets, lasting an average of 363 days compared to 1,742 days for bull markets. According to data provided by Invesco, bear markets also tend to be statistically less severe, with average losses of 33 percent compared to bull market average gains of 159 percent.
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A few of weeks later, the coronavirus bear market that began on March 11, 2020, turned a bull-market phase, although the entire economic impact of the virus has yet to be known.
How to invest during a bear market
Use dollar-cost averaging to your advantage
Consider that the price of a stock in your portfolio falls by 25%, from $100 per share to $75 per share. If you have money to invest and want to purchase more of this stock, it can be tempting to try to purchase when you believe the price has dropped.
However, you will likely be incorrect. This stock may not have reached its lowest point at $75 per share; rather, it may have fallen 50 percent or more from its high. This is why attempting to predict market bottoms or “time” the market is dangerous.
A more responsible option is to invest money in the market on a regular basis using dollar-cost averaging. Dollar-cost averaging is the practice of consistently investing money in nearly similar quantities over time. This prevents you from investing all your money in stocks at their peak (while still taking advantage of market dips).
Bear markets are undeniably terrifying, but the stock market has demonstrated it will eventually recover. Bear markets can be buying opportunities if you focus on gains rather than losses.
Diversify your investments
Increasing your portfolio’s diversification — so that it comprises a variety of assets — is another important technique, down market or not, related to purchasing equities at cheaper prices.
During bear markets, all of the businesses in a certain stock index, such as the S&P 500, tend to decline, though not necessarily by the same amount. Therefore, a diverse portfolio is essential. By investing in a variety of relative successes and losers, you can reduce your portfolio’s overall losses.
If only you could anticipate the winners and losers! Bear markets often precede or coincide with economic recessions, thus investors select consistent-return investments during these times. This “protective” strategy may require the following portfolio additions:
Even if stock prices aren’t increasing, many investors still desire dividend payments. Consequently, companies with above-average dividends will be attractive to investors during downturn markets. (Interested in dividends? Consult our list of 25 dividend-paying stocks.)
Bonds are also an excellent investment during volatile stock market periods since their prices frequently move in the opposite direction of those of stocks. They are a vital component of any investment portfolio, but the inclusion of additional high-quality, short-term bonds may help mitigate the pain of a down market.
Invest in industries that do well during economic recessions.
Consider sectors that tend to perform well during market downturns if you want to add some stabilizing assets to your portfolio. Consumer staples and utilities typically withstand weak markets better than other investments.
Investing in specific industries is possible through index funds and exchange-traded funds that track a market benchmark. Investing in an index fund or exchange-traded fund (ETF) gives more diversification than buying a single stock.
Prioritize the long-term
Bear markets put all investors’ resolve to the test. While these periods are difficult to endure, historical evidence suggests that the market will likely rebound quickly. And if you are investing for a long-term purpose, such as retirement, bear markets will be eclipsed by bull markets.
Bear market examples
Bear markets are extremely common. There have been 33 of them since 1900, meaning they occur on average every 3.6 years. Just to cite three recent noteworthy examples:
- 2000-2002 dot-com crash: Growing internet usage in the late 1990s led to a major speculative bubble in technology stocks that burst in 2000-2002. After the bubble burst, all major indices plummeted into bear market territory, but the Nasdaq was impacted the hardest: By late 2002, it had dropped around 75% from its previous highs.
- 2008-2009 financial crisis: A flood of subprime mortgage lending and the subsequent packaging of these loans into investable securities caused a global financial catastrophe in 2008. Numerous banks failed, necessitating substantial bailouts to prevent the collapse of the U.S. banking system. Prior to its lows in March 2009, the S&P 500 had declined by more than 50 percent from its prior highs.
- 2020 covid 19 crisis: The 2020 bear market was precipitated by the COVID-19 epidemic, which caused economic shutdowns in the majority of wealthy nations, including the United States. Due to the rapid spread of economic uncertainty, the stock market’s descent into a bear market at the beginning of 2020 was the quickest in history.
Nevertheless, one of the finest things you can do for your portfolio is to resist the desire to sell investments when the market plummets. If you find it difficult to keep your hands off your money during a bear market, you can have a robo-advisor or a financial advisor manage your investments during both bull and bear markets.