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What is a Bear Market?

When it comes to investing, it is key to understand what a bear market is in order to make smart investment decisions.
Stock Market

A bear market is a period when investors are generally pessimistic about the future of the stock market.

A bear market may last for as little as a day or several years. It’s typically characterized by widespread pessimism and falling prices, with stock values falling more than 20% from their recent high.

Where does the term “bear market” come from?

The term “bear market” was created by comparing how bears attack by swiping downward as opposed to bulls that charge upward. 

Similarly, a bear market refers to a period where stock prices are falling, and investors feel pessimistic about the future state of their investments.

Bear Market

When Do Bear Markets Occur?

A bear market is a prolonged decline of stock prices that lasts for at least two months and affects most stocks. The term is also used for more considerable losses, as in “the market’s been down for three years.”

Bear markets are often caused by recessions, which reduce consumer spending and business investment. A bear market occurs when a specific index, like the Down Jones Industrial Average, falls 20% or more from its most recent 52-week (one year) high.

Recessionary periods can last anywhere from six months to four years but generally do not go on indefinitely. 

When recessionary conditions end, they’re usually followed by bull markets—periods when investors expect the economy to improve and businesses increase spending accordingly.

A Bear Market is a Period

A bear market is a period when investors are generally pessimistic about the stock market’s direction. This can occur for a variety of reasons. The most obvious reason would be that investors have lost confidence in the ability of companies to earn profits and reward their shareholders, which leads to lower stock prices. 

A recession could also cause a bear market because it lowers corporate earnings, causing investors to become less optimistic.

Many economists believe that recessions are caused by capital shortages (money), which causes people to spend less and businesses to cut back on production as inventories build up at warehouses and factories across the country. 

In turn, this makes investors more pessimistic about future growth prospects for corporations—and leads them to sell their company shares at bargain prices before they drop further still.

Bear markets usually occur after an economic recession

A bear market is also defined by its tendency to be longer than a bull market length, more volatile, and more likely to occur during recessions. 

For example, if you look at all periods where both types occurred over the past 100 years, you find that bear markets outnumber bull markets by about 2:1 (111 vs. 52). 

And while the average duration for a bull market was three years with an average 45% return per year over those periods, bear markets lasted six years. Still, they had much higher volatility, with an average loss rate of 47% per year.

What causes a bear market, and how long do they last?

During bear markets, prices usually fall, and there’s less buying activity. 

It’s important to note that although declining prices often characterize bears, they aren’t always accompanied by price drops. 

However, when there is a drop in price during this period of pessimism, it can last for several months or even years (e.g., 1990s Japan).

A bull market is the opposite; it typically refers to an upward trend in stocks and other financial assets (like bonds), where investors anticipate further increases in value instead of decreases. This optimistic sentiment encourages more aggressive buying because people believe they will make money on their investment—and they want it now. 

How to invest during a bear market

When you’re in a bear market, it’s easy to feel like the entire world is against you. The stock market has been down for months and doesn’t seem to be going anywhere. You probably have money sitting around that you want to invest, but nothing seems safe enough to take on the plunge. Still, there are ways to support during this time and ensure your money doesn’t sit idly by while the rest of the economy is struggling. Here are some tips for keeping your investments safe during a bear market:

Make dollar-cost averaging your friend.

When you dollar-cost average, you invest a fixed amount of money on a regular schedule, regardless of price. 

For example, if the price of a stock in your portfolio slumps 25%, from $100 a share to $75 a share, then each month’s purchase will be worth more than it would have been if that same number had been invested all at once. 

If you invest the same amount each month and pay the same price for each share, you will end up with more shares than if you invested all at once.

Diversify your holdings

Diversify: Risk management technique that combines a wide variety of investments within a portfolio

The key to minimizing risk is diversification. Diversifying your portfolio means investing in different asset classes, industries, sectors, and types of securities.

For example, if you were trying to protect your investments from the fallout of a downturn in the tech industry by only investing in one company (we’ll call it Zeebiz), you would probably lose money because when Zeebiz goes down, so makes your investment. 

But if instead of putting all your eggs into one basket (Zeebiz), you spread them out among several baskets (Google, Amazon, and Microsoft), then when one falls, another may be climbing. This allows some growth while mitigating losses due to one’s fallback position being struck by a bear market or other economic phenomenon.

Invest in sectors that perform well in recessions

Diversifying your portfolio is essential, especially when the market is going through a bear cycle. That way, if one sector takes a bigger hit than others and your investments are affected by that sector’s performance, you should still have other sectors in your portfolio that will perform well during recessions.

Recession-resistant sectors are those that tend to perform well even when the economy is suffering:

● Technology — for example, big data or cybersecurity

● Healthcare — hospitals or pharmaceutical companies

● Consumer staples — food and beverage companies or household products providers

● Utilities (gas/electricity providers)

● Energy (oil & gas companies)

● Basic materials (mining)

● Real estate

Focus on the long-term

In the long run, you’ll be better off if you focus on the long-term and don’t panic.

If you’re having trouble sleeping because of a bear market, know it won’t last. 

You can also consider taking some time off from your day job and investing in something else that interests or excites you. 

Or, if there’s an exciting industry or company to you right now, it might be a good idea to invest in that while everyone else is panicking over their investments, losing money during a bear market. Bear markets are a great time to invest because you can buy low. 

Municipal bonds

Municipal bonds are often considered a lower-risk alternative to corporate bonds but are not risk-free. This is because they tend to be more sensitive to interest rate fluctuations than other investment vehicles. 

Likewise, municipal bonds also have their own set of tax benefits. Their interest is exempt from federal income taxes for residents who hold the bond in their state or local community.

As with any investment, there are pros and cons—and one important consideration here is that the interest rate on municipal bonds is generally lower than on corporate bonds.

For example, if you buy a 10-year municipal bond with a 5% coupon rate from Ford Motor Credit Co., then your annualized dividend would be around 4%. 

Meanwhile, if you invested in Ford Motor Co.’s stock instead (which isn’t precisely low risk), its yield would be just over 6%.

That said, one significant advantage of municipal bonds is that tax dollars back them: 

If the issuer defaults on their payments or goes bankrupt altogether, investors won’t lose any money because municipalities have access to government funds that can bail them out when necessary.

Bear markets are stressful, but there are options for persisting.

In a bear market, it’s important to remember that there are options for persisting. It’s natural to want to pull out all of your money and run away when things get tough.

But you don’t have to do this—and it would be a mistake anyway because, in the long run, stock prices will go up again.

The best thing you can do is make dollar-cost averaging your friend. This ensures that your portfolio has some stability over time, even if its value fluctuates wildly from one month or year to another (as it will during an economic recession). 

Diversifying is another smart move as well: Investing in different sectors means that if some sectors perform poorly due to recessions (energy), others will probably hold their own or even thrive (technology).

The most important thing, though? Don’t panic. Bear markets are stressful, but they’re everyday occurrences in any economy; they happen every few years or so and tend not to last very long either (which makes them more bearable). 

As long as you keep investing regularly over time no matter what happens between recessions—and stay focused on where we’re going rather than how we got here—eventually everything will turn around again.

Conclusion

A bear market is a period when investors are generally pessimistic about the stock market’s direction. 

They sell stocks in anticipation of further declines and wait for profits until the economy improves or until there are signs that prices will rise again. 

-This type of market usually occurs after an economic recession, defined as a period of two or more consecutive months of negative GDP growth. 

The term “bear market” was created by comparing how bears attack and hit downward as opposed to bulls that charge upward!

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