Bear Market Definition

A situation in the markets, usually stock markets, where traders expect asset prices to fall. Therefore, they bet on short positions, ie. sell assets. The term “bear” is derived from the way a bear swipes its paws downward, representing the price movements of a bear market. Bear markets are typically long-lasting, and often result in investor panic as prices continue to drop.

For many investors, the expression “bear market” is a significant source of worry. Nevertheless, these steep downward trends in the stock market cannot be evaded and are generally short-term when compared to bull markets – periods where stocks rise in value.

What’s more, bear markets can even present advantageous investment openings!

What is a bear market, exactly?

When the stock prices of investments experience a prolonged, downward slide and dip lower than 20% of its previous peak then that is commonly referred to as a bear market. However, when the opposite occurs – an increase exceeding 20 %- it can be defined as a bull market.

Historically, when stocks sink by 20%, it is referred to as a bear market. On these occasions, the situation can become worse over time with few moments of respite or ‘relief rallies’ as investors feel overwhelmed and disheartened. Underneath this pessimism, any positive news appears futile – allowing prices to go even lower for those resilient enough to invest. Eventually, confidence will be restored in the stock markets and the vicious cycle of a bear market concludes.

When individual stocks or exchanges face bear markets, their single-stock sentiment is generally not noticed in the larger market. Yet, when a wide variety of stocks—even those that have reported positive news and increased quarterly earnings—are impacted by a downward trend across the board, then an overwhelming downturn will be observed throughout.

Leverage your understanding of the potential effects of bear markets and proactively employ strategies to ensure that your portfolio not only survives but also thrives during this challenging period until the market ultimately turns positive.

How to invest your money during a bear market

Bear market strategy #1: Use leva-cost averaging

If your stock portfolio is showing a 25% drop in price, from 100 leva to 75 leva per share and you have funds available to make an additional investment – it can be appealing to buy the stock when its value appears extremely low.

Chances are, you would be incorrect. That stock could drop to 50% or lower of its peak rather than bottoming at 75 leva per share. This is why attempting to predict the bottom and “time” the market can be so dangerous.

A wise decision is to invest regularly with a plan called dollar-cost averaging. This is when you consistently contribute money in equivalent amounts over time and it helps to spread out your purchase cost, making sure that you don’t throw all of your funds into the stock market at its peak (and also benefit from any potential falls).

Bear market strategy #2: Diversify your holdings

Even if we’re not in a bear market, diversifying your portfolio by adding different kinds of assets is an excellent method to obtain stocks at lower prices and enhance your portfolio.

When the markets plunge into a bear market, it’s normal for all stocks in an index such as the S&P 500 to decline – and not necessarily by equivalent amounts. This is where diversification comes into play! Investing in both likely winners and potential losers can help minimize your overall losses when turbulent times hit. Wouldn’t it be great if you could somehow predict these outcomes? When faced with bear markets that can often be a precursor to economic recessions, investors oftentimes turn to assets offering more reliable returns even in the face of an uncertain economy.

Bear market strategy #3: Invest in areas that perform well during recessions

During bear markets, what investments tend to thrive? Consider the items that individuals will need no matter the circumstances – those are typically sectors that continually perform reliably during market slumps. Even with high inflation rates, people still require gas, groceries, and healthcare services; thus consumer staples and utilities usually fare better than other industries in a bear market.

Investing in index funds or exchange-traded funds (ETFs) allows you to explore specific sectors and track a market benchmark. For instance, investing in consumer staples ETF will provide access to numerous companies from that industry, which tend to be more reliable during economic downturns. Furthermore, these instruments are far superior compared with singular stock investments as each one of them holds shares for many different businesses – providing diversification advantages.

Bear market strategy #4: Focus on the long-term

All investors go through a trial of perseverance during bear markets. Although difficult to withstand, the past has indicated that recovery is typically just around the corner. If you’re investing for longevity, such as retirement, the bear markets encountered will be overshadowed by the bull markets. However, funds intended to reach a short-term goal within five years should not be placed in stock market investments.

It can be difficult to prevent the temptation of selling investments when markets are down, yet it is one of the most beneficial things you can do for your portfolio. If you find yourself struggling to not meddle with your finances during a bear market, consider enlisting a financial advisor or robo-advisor who will manage them both through highs and lows.