Investing During a Bear Market
Lately, financial pundits seem to be constantly warning that a bear market is coming, arguing over whether one has begun or predicting when one will end. It’s less common for them to actually define one. From their ominous tone, you can tell it’s less appealing than its counterpart, a bull market. But what is it exactly? How does it differ from other market fluctuations? And how long does one last?
What is a bear market?
A bear market is an extended period of depressed securities prices. Generally, the stock market is said to have entered a bear market when a broad index, such as the S&P 500, spends at least two months at 20% or more below its previous peak. Bear markets represent a larger price drop than a dip, defined as a drop of less than 10%, and a market correction, a drop of between 10% and 20%.
A bear market is not the same thing as a recession, which is defined by a range of other economic factors, like gross national income (GNI) and the unemployment rate. But it’s not uncommon for bear markets and recessions to occur around the same time. The appearance of one may raise fears that the other is looming.
When people talk about bear markets, they’re usually referring to a general drop in prices across the stock market. But they can exist for other asset classes, such as bonds. They don’t have to be that broad, either. Sometimes a single sector or commodity can be experiencing its own bear market while the prices of other securities in its asset class continue to climb.
How long do bear markets last?
As measured by the S&P 500, bear markets have lasted anywhere from a few weeks to several years. No one can predict with certainty when a bear market will end. Historically, bear and bull markets have not appeared on a regular schedule. Far from it. For example, the bear market of 2020 was the first one the S&P 500 had experienced since 2009. The next bear market appeared less than two years later.
In fact, you can’t know for sure that a bear market has ended until you’re well into the next bull market. Once prices have returned to their previous peak, you can look back to find the point when prices were at their lowest — that’s when the bear market ended and the new bull market began.
What do bear markets mean for investors?
Investors respond differently to bear markets depending on their goals and strategy. Aggressive traders may seek to make money in a bear market with risky strategies, such as short sales. In a short sale, an investor sells borrowed stock, buying it back later to return to the lender. If the price dropped in the meantime, they’d make a profit.
To decide what you should do in a bear market, it’s best to consult your financial advisor. If you’re investing to meet long-term financial goals, it may make sense to hold steady during a bear market. That’s because the stock market has historically increased over the long-term, despite bear markets. Selling when prices are low risks selling at a loss, while staying in lets you participate in the rising prices of a potential recovery.
You may consider dollar-cost averaging, a popular investment strategy in which you contribute a set amount of money to your stock portfolio at regular intervals. It’s designed to help you buy more assets during a bear market when prices are low. By contributing a consistent dollar amount to your investment portfolio, you will naturally buy more shares of a stock or fund when prices are low and fewer when prices are high. This can benefit you in the long run by lowering the average price you pay per share.
The inevitability of market downturns is why investors build diversified portfolios in the first place. It makes it less likely that your entire portfolio will be experiencing a bear market at the same time. Your advisor can help you decide what a particular bear market means for your overall plan and whether you need to change your approach if markets take a downturn.