Fear grips many investors when they hear the word "bear market." While these deep downturns are unavoidable, they are often relatively brief, especially in comparison to bull markets, when stocks are rising in value. However, bear markets can be profitable too. Whenever securities or commodities continuously fall in value, it is called a "bear market," like the one currently affecting US stocks. A "bull market" is when assets steadily rise over time. Although stock prices are rational, in that they are always fair and based on available information, it is hard for many to resist using emotional terms like "bulls" and "bears," which invoke the "animal spirits" of investing.
How can you tell when you're in a bear market?
A prolonged drop in investment prices characterizes a bear market. It occurs when broad market indices fall by 20% or more from their most recent highs. Bear markets can occur for a market as a whole, such as the Dow Jones. Investors' pessimism and low confidence also mark a bear market. During a bear market, investors ignore any good news and continue selling quickly, driving prices down even further. In the event that investors are bearish on one stock, the sentiment may not affect the market as a whole. Nevertheless, when the market turns bearish, almost all stocks fall, even if they are reporting good news and growing earnings.
What are the consequences of bear markets?
In the 12 years since World War II, there have been three bear markets that did not precede a recession. Taken at face value there is some chance, if not a likelihood, of a recession in the near future when a bear market occurs. Two-thirds of the time, a recession is the result of the market's madness. The recent retiree is especially hard hit, since their nest egg shrinks at the same time as they have to withdraw income from it.
Bear markets also have a psychological impact on investors, which can lead to a vicious cycle. Investors tend to sell even more when they perceive a bear market, driving prices down further and prolonging the pain. A shrinking economy suggests corporate profits will decline in the near future, so investors sell stocks, causing the market to drop. A bear market could signal more unemployment and tough economic times to come.
Investment Techniques that Work During a Bear Market: Dollar-Cost Averaging
If you want to invest wisely, you should use a dollar-cost-averaging strategy. Dollar-cost averaging is when you gradually invest money over time and in similar amounts. This way, you avoid investing all of your money into stock at its peak (and take advantage of a market dip).
Even though bear markets can be frightening, the stock market, and the crypto markets, have proven they will recover eventually. When buying stocks at a lower price during a bear market, focusing on potential gains rather than losses can be a wise decision.
Invest in a Wide Variety of Industries, Projects, or Products
In addition to buying stocks or crypto investments at lower prices, diversifying your investment portfolio is another valuable strategy. During bear markets, all the companies in an index, such as the S&P 500, fall - but not by the same amount. That's why having a well-diversified portfolio is key. If you hold a mix of relative winners and losers, you minimize your portfolio's overall losses.
Only Look at the Long Term
All investors face bear markets, but history shows that you won't have to wait too long for the market to recover. You will likely endure bull markets if you are investing for a long-term goal like retirement.
Money you need for short-term goals, such as those you hope to achieve within five years, should not be invested in long-term portfolios.