Bear markets- what are they and investing during one

The stock market is known for its volatility, and there are times when the market experiences a significant decline, which can lead to investor panic and uncertainty. This is commonly known as a bear market. Bear markets are a natural part of the market cycle, so they come and go. And even though they don’t last forever, its important to be informed as an investor so you know what to do when the market is in one.

What is a bear market?

A bear market occurs when there is a 20% or more drop in prices from recent highs. While stock prices are constantly fluctuating, in a bear market, prices remain lower or further decrease for months or even years. A bull market is the opposite; it occurs when prices increase by 20% or more from recent lows. Simply put, stocks go up for a prolonged period in a bull market, and they go down in a bear market.

Bull markets can be confused with bear market rallies. Whereas in a bull market where stocks are on a sustained uptrend, a bear market rally is when stock prices temporarily rise after plunging into a bear market before falling again. In this case, it may seem like the bear market is over, but it actually isn’t.

What causes bear markets?

The causes of bear markets can vary, and there can also be a combination of factors pushing the markets down. In general, some of these factors include:

• A weak or slowing economy
• Bursting market bubbles
• Geopolitical crises
• Government intervention in economic matters
• National or global events e.g., pandemics or wars

How long do bear markets last?

Stock markets are cyclical; they go up, and they go down. According to Putnam Investments, from 31.12.48 to 31.12.22 (a 74-year time frame), the S&P 500 saw 14 bear markets. While each has been different, ranging widely in duration and severity, on average, they lasted for 13 months and saw declines of 25.3%.

That may sound scary, but the market has always recovered. During the same period from Putnam’s research, there have been 14 bull markets lasting on average for 50 months and saw an average cumulative return of 136%.

How to invest in a bear market?

If you are new to investing, you may have never experienced a bear market. Therefore, here are tips to think about when investing during one:

Diversify your portfolio

In general, during a bear market, all the companies within an index, such as the S&P 500, tend to fall. But they might not fall by the same amount. Some companies, industries and even different types of financial products might be more or less impacted than others. So it’s important to have a well-diversified portfolio to help spread your risk. As they say, don’t put all of your eggs in one basket.

Focus on the long-term

You may be tempted to sell when the markets get rocky. While bear markets can initially cause panic, as mentioned before, they don’t last, and the market will recover at some point. It’s wise to keep your investment plan in mind and your long-term goals.

Consider dollar-cost averaging

Dollar-cost averaging is an investment strategy that focuses on time in the market instead of timing the market. When following this strategy, you invest a fixed amount of money at regular intervals, regardless of the share price. When stock prices are high, you will get fewer shares for your fixed amount of money, and when stock prices are low, you will get more. This strategy, over time, can lower the average cost per share paid compared to if you bought all the shares outright at a higher price, and it also takes emotional factors out of investing.

Key takeaways

• A bear market occurs when a market experiences prolonged price declines.
• Bear markets come and go. And historically, bull markets have lasted much longer than bear markets.
• When there is a bear market, you can help protect your investments by diversifying your portfolio, focusing on the long-term and consider using a dollar-cost averaging strategy.

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The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience. Diversification does not guarantee a profit or protection against loss in declining markets.

Sources: Bloomberg, Reuters, Investopedia, Putnam Investments, Nerdwallet, Motley Fool, NYT, NPR