How Should You Invest in One? What is a Bear Market? Even on a good day, stock market investing is risky.
When prices start to fall, it could be a simple correction or the start of a bear market. With the recent volatility, 2020 saw the biggest downturn since the biggest drop, and now it’s wondering what will happen next. How do you know you have to worry?
It is not possible to know if a downturn will become a bear market until it occurs, but knowing what a bear market is can ease your anxiety while waiting to see which direction the market is heading. The short answer is no. Volatility, corrections, and bear markets start in much the same way.
What is a Bear Market?
When prices fall by 20% or more from their most recent peak and the decline continues for at least two months, you know it’s a bear market. Fluctuations are a normal part of investing, but the bear market is a steady decline in prices. This is usually accompanied by a generally negative outlook and a loss of investor confidence in the market.
But the bear market also takes into account individual stocks that maintain at least a 20% decline. Bear markets are taken into account when prices fall in a general market or index such as the S&P 500.
Usually, a bear slides off its paws. When you think of a bear market, think about how the bear attacks its prey. Hence the term bear market. This downward movement mimics the decline in stock prices.
Remember that investing is emotional and easy to lose logic when prices continue to fall. The bear market is often accompanied by negative economic indicators such as recession, low employment, and rising inflation.
But selling isn’t always the best strategy, even in the bear market. With below-average returns, investors may panic and sell their stakes to avoid further losses.
Bear Market Phases
As prices rise, so does the attitude of investors. The bear market usually follows a period of growth in stock prices. In this first stage, investors want to get the highest price for their investments and start selling their stock for a profit.
Fearing falling prices, the mood becomes pessimistic as the market continues to shrink. With stocks being sold, prices will suddenly start to fall and investors will be nervous.
Hoping to avoid losing even more money, they sell their investments more aggressively and stock prices start to fall. Investors usually start to worry in this second stage.
To take advantage of low prices, speculators take the opportunity to buy when the market falls. Sufficient time has elapsed in the third stage and the market is in the bear market area.
This increase in trading volume slows down the decline in stock prices and may even cause some to increase in value.
An increase in market trading paves the way for stock prices to rise. Ultimately, this market reinvestment will increase investor confidence and further slow the market downturn.
As this happens, bear markets often lead to bull markets as investor sentiment increases and prices continue to rise.
Bull vs. Bear Market
Instead of pessimism and a declining rate, stock prices in bull markets are rising. Bull markets are essentially the opposite of bear markets. As with the bear market, it is almost impossible to predict when market trends will turn around.
Although bear markets indicate a weak economy, an increase in bull markets and their market conditions usually occurs when the economy is strong or in sync with the strengthened economic outlook. You usually know it’s a bull market when stock prices rise by at least 20% after a recent drop of 20% or more.
Bear Market vs. Market Correction
With a market correction, the decline usually lasts less than two months and is usually limited to a 10% price reduction. Although the bear market and the market correction are characterized by declining market prices, they have different characteristics.
Another stark difference is the negativity associated with bear markets. Compared to the bear market, which is a decline of at least 20% that lasts for two months or more, market corrections are short-lived. With a sharp drop in prices, investors are less optimistic.
The market correction is far from dissuasive. Instead, investors tend to believe that prices have risen less naturally than they should, and a drop of around 10% is just a return to true market value.
What to Do in a Bear Market
Seeing a portfolio drop isn’t a good feeling, but it’s sometimes the best thing to do. In the bear market, declining values create fear and uncertainty. If emotions control your decisions, it is a recipe for disaster and can lead to losing more money than letting it go.
Instead of letting go of panic, you should do the following in the bear market.
Review your portfolio
You can review your own portfolio or check with your broker. The bear market is the perfect opportunity to review your investments. Keep in mind that your broker does not have a crystal ball and cannot predict the best time to buy or sell.
Even with a declining market, it may make more sense to hold stocks in quality companies. A company will only close because its share price is decreasing. If you are not comfortable with some of your investments, it is okay to ditch them, as long as you use logic and not emotions to make a decision.
Keep your expectations in check
For example, a more aggressive portfolio may experience greater losses in the bear market than more conservative investments. Losing money is not fun, but it is often an unavoidable part of investing. Depending on your tolerance for risk, your portfolio may be more or less affected by falling share prices.
Bear markets won’t last forever and prices will eventually rise again. Markets can swing up and down. Whatever happens, keep your expectations in check.
Although the goal is to make money, you cannot always expect to buy when the market is low and sell when it’s high. Investing is fraught with uncertainty and the stock market is unpredictable, but timing is never a good idea.
Sometimes it is better to turn off the news and patient. Close monitoring of stock prices can cause emotions to rise and this can lead to irrational decisions.
Bear Market FAQs
The consensus is that they “hang on” and wait. As you walk through the bear market, you may think about what to expect in the future. Although you may not be wondering what is causing the bear market and how long it will last.
What causes a bear market?
It is typically associated with a weak or slowing economy that suffers from low employment, declining disposable income, and declining business profits. As with most things in life, the reason for the bear market is unknown. Although investor sentiment also plays a role in shaping the bear market.
However, if the bear market is already here, the selling of stock could feel the momentum and drag on. For example, when investors fear falling stock prices and sell their investments, it can trigger a sharp decline that leads to a bear market.
How long does a bear market last?
But, by definition, the decline continues for at least two months and often longer. Contrary to what you might think when you walk in the middle of a bear market, they don’t last forever.
How long the bear market lasts, there are two classifications: secular and cyclical. Since the cyclical market only lasts a few months, it does better.
But historically, the average length of a bear market between 1400 and 2013 was 14 months. On the other hand, secular bear markets last much longer, between 5 and 25 years.
Should you buy stocks in a bear market?
In general, the stock market correction is a more favorable entry point for investors, but there are still many opportunities to buy stocks in a bear market. Falling prices may suggest that you should stop buying stock, although this is often fueled by fear and confusion during a period of decline.
Long-term investors have a great opportunity to buy stocks at a low price. Better to view falling prices as a sale than a disaster. Of course, there is a risk that the price will drop after the purchase. But if you keep it for a while, you can buy at low prices.
A Bear Market is No Cause for Panic
The stock market is usually present everywhere. One day is up, the next is down. But when you keep shrinking and entering the bear market, there is no reason to panic.
The best way is to review your portfolio, exercise realistic expectations, and patience. Instead of being a constant concern, keep in mind that falling prices won’t last forever and the market will eventually boom.