What is a Bear Market?

Bear markets have earned a bad reputation. They occur when a market experiences a prolonged price decline. Thus, stockholders that need to sell during such time will do so at a loss. 

But bear markets aren’t all bad news. Investing in a bear market could mean buying cheap stocks and selling them for a higher profit after the recession.

Recognising a bear market and knowing how to invest in it is crucial to avoid financial mistakes.

At a Glance: Pros & Cons of Bear Markets 

Bear markets happen when assets plummet 20% or more from recent highs over a period of two months. They are known as some of the scariest market events, but all is not lost during a bear market. Here are some of their pros and cons.

Pros

✔️ Lower stock prices. The main advantage of an economic decline is the ability to buy stocks for a lesser price compared to buying the same stocks during a bull market. This event opens opportunities for investors that don’t want or can’t afford to invest huge amounts. 

✔️ Enables profit making. Stock value tends to decline during a bear market, but prices will go back up eventually. When that happens, you can sell everything for a profit or capitalise on dividends. 

✔️ Opportunity to invest in real estate. Stock prices aren’t the only ones to go down during a bear market. Housing prices decline, too, giving investors an opportunity to buy real estate cheaper than they ordinarily would. However, investing in real estate during a bear market is only wise if you have savings to invest in. Selling a house or applying for a mortgage may have more downsides than advantages.

✔️ Short trade opportunities. Another way to make money during a bear market is by short-selling stocks. This kind of investment is risky, but it could lead to high profits if you have market knowledge and can predict trends easily.

Cons

❌️ Nerve-wracking. Bear markets are periods of economic decline that see businesses shut down and stock markets crash. Most investors tend to react emotionally when seeing their portfolios declining in value, which could lead to reckless decisions. According to experts, though, selling because the market has dropped and you think it’s going to drop further is a mistake. 

❌️ Room for speculation. When stock markets decline, most brokers and investors tend to speculate a lot. Speculation increases volatility, making stocks behave similar to cryptocurrencies and other speculative assets. The stock price can go up or down based on demand.

❌️ Market crashes. Perhaps the biggest downside of bear markets is their ability to lead to whole market crashes if collective investors panic and start selling their stocks at the same time. This behaviour increases inflation and can cause businesses to shut down.

What is a Bear Market? 

Bear markets are periods characterised by a prolonged drop in investment prices. They typically happen when a broad market index falls by 20% or more from its most recent highs over a two-month period. However, most markets plummet much more than the 20% threshold.

Occasional relief periods may happen during this period of recession, but the general market trend is downwards. This is due to investor pessimism — investors tend to ignore good news and continue selling their assets quickly, pushing prices even lower.

A paradox of bear markets is that investors’ pessimism gives rise to opportunities for other investors who take advantage of the lower prices to buy cheap stocks. 

While the bear market term usually refers to broad markets or indexes (almost all stocks begin to decline), investors can also turn bearish on an individual stock. 

What Causes Bear Markets?

Historically, recessions have been the main cause of bear markets. However, the phenomenon can have multiple causes, including: 

• Slowing economic growth or poor economic data 
• Market bubbles bursting, such as the tech bubble
• Geopolitical crises, such as wars
• Global health crises 
• Overly contractionary fiscal or monetary policies

How Long Do Bear Markets Last?

The length of bear markets can vary dramatically depending on its cause and location. Globally, bear markets lasted for an average of 289 days, or about 9.6 months. 

While this could seem a long time, bull markets last significantly longer — around 991 days (2.7 years) on average. 

Stock performances are also significantly different during bull and bear markets. 

Globally, stock values drop by 36% on average. However, the same stocks gain 114% on average during a bull market. This is why most financial experts advise against selling the assets when their value starts to drop. 

In the UK, however, the average bear market lasted 385 days. Index value depreciation wasn’t much different than the global trend, the stock value dropping by 36.7%. 

Comparatively, bull markets in the UK lasted 5.9 years on average, with an average recovery period from a bear market of 648 days.

Is it Wise to Invest in a Bear Market?

Bear markets are characterised by negative investor sentiments, but the truth is that a lower demand for securities comes with lower or constant stock prices.

This drop in stock value makes it wise to invest in companies with a good track history. 

Although all companies could go bankrupt during a recession or crisis, investing in an established corporation that has been around for decades mitigates some of the risk. During a bear market, it could also be wise to invest in commodities such as gold or oil. 

Bear Market Investing Guide

Seeing the value of your portfolio decline rapidly can be distressing. However, it is important to remember that bear markets are normal and much shorter than bull markets.

There are ways to reduce investment risks, too.

Here’s how to invest in a bear market. 

1. Align asset allocation with your goals

The first thing to do when investing in a bear market is setting clear goals and expectations. If your goals are short-time, only consider low-risk investments even if they have a lower return. 

Long-term goals allow for some risk-taking, but you should analyse the market carefully before deciding which assets to invest in. In the long run, riskier investments could turn into a heftier profit.

2. Diversify your portfolio 

An easy way to reduce risks is by diversifying your portfolio. If you’re a beginner, it might be a better idea to invest in ETFs than individual stocks during a bear market. 

If you already hold specific stocks, use your capital for alternative investments, such as mutual or index funds. A diverse portfolio can help you offset losses in one investment with gains from another.

3. Focus on quality

Buying stocks during a bear market may appeal to investors who want to own shares in a specific company. Before investing, though, analyse the company and make sure it has rock-solid balance sheets and clear competitive advantages.

Even if the stock value may still decline after investing, a solid company has good chances of surviving the tidewater. Comparatively, those who have been “swimming naked” will likely go down.

4. Don’t expect too much

The two most common trends during a bear market sees investors trying to catch the bottom or waiting to invest until the market shows signs of improvement. However, predicting the market is near impossible.

Bear markets often show signs of improvement before plummeting again. 

Likewise, the market decline may look like it has reached its lowest point, but the value of securities may still go down. The best strategy is to invest fixed sums at regular intervals and in a diverse portfolio.

5. Consult with a financial advisor 

It is completely natural to feel uncertain or anxious during a bear market. A financial advisor can review your investment portfolio and finances and help you develop a plan to protect your assets.

Top Investing Apps 

Investing during a bear market can have benefits if done right. These top trading platforms can help you get started. 

1. Vanguard

Vanguard is best suited for long-term or retirement savers. New investors can also take advantage of the platform’s all-digital advice service. The broker also features access to an experienced financial advisor.

2. Moneybox

Signing up to Moneybox is very easy and you can start with as little as £1. The best thing is that you can switch to investing larger amounts within the same app whenever you feel confident enough.

To End

Bear markets are periods of economic decline. They don’t have a predictable duration, but could open up entry points for new investors in the trade market. 

Surviving a bear market as an investor can be challenging, especially if you invested in single stocks. Diversifying your portfolio and seeking advice from a financial planner could be your keys to success.

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