What Is A Bear Market And How Should You Invest In One?
If you are new to stocks, expect to hear the terms “bear” and “bull” a lot. They are terms used to describe market conditions. By their simplest definition, a bull market is when stocks are on the rise and a bear market is when they are falling.
While the bull market may be more attractive, it pays to learn about the bear market too. After all, it is an inevitable part of investing, and even the most experienced investors can find themselves caught off guard by a sudden shift.
Here’s what you need to know about bear markets—and how to invest in them.
What is a Bear Market?
A bear market is a market in which the prices of securities fall by 20%, and widespread pessimism causes the downward trend to be self-sustaining. Investors expect prices to fall and so sell their holdings, leading to lower stock prices.
Two things need to happen before a bear market is declared:
- The market falls by 20% from its recent high
- There is a widespread expectation that prices will continue to fall
While bear markets are typically associated with stocks, any asset can fall into a bear market. This includes commodities, real estate, and even currencies.
Are Cryptocurrencies Included?
The cryptocurrency markets may be more volatile in comparison, but they are no different. From Bitcoin to altcoins, the entire digital asset class is prone to both bull and bear markets. For crypto, however, it is more common to see bull runs.
What Does a Bear Market Mean?
When a bear market occurs, it is not caused by a single event. Rather, it is often the result of a combination of factors, such as economic recession, high-interest rates, political instability, unprecedented public health crises or natural disasters. For example, the COVID-19 pandemic caused stocks to plunge into bear territory, as reported by CBS News in March 2020.
Bear Market Vs. Bull Market
By contrast, a bull market is a market where prices soar by 20% from a low and optimism is high. Investors are confident in the future and are buying assets, leading to price appreciation.
For a bull market, two things need to occur:
- The market rises 20% from a recent low
- There is widespread optimism about the future
Several factors cause a bull market, including economic growth, low unemployment rates, and healthy corporate profits.
Are We in a Bear Market?
It has been a volatile bear market so far this year. June 2022 saw the S&P 500 slip into the bear market territory by 20% after its January rise. However, in July, the S&P 500 managed to rally by 9%, recovering from its June lows. But many experts see it as a short-lived high or a “bear market rally”. CNBC reports that stocks began to slip again this August, with S&P 500 falling at 0.28%, Nasdaq at 0.18%, and the Dow at 0.14%.
What is a Bear Market Rally?
A bear market rally is a short-term increase in stock prices that takes place during a longer-term decline. While this may sound like good news for investors, bear market rallies can be quite deceiving.
They often lure investors back into the market, only to see prices drop again soon after. As such, it’s important to be cautious when stocks start to rebound during a bear market—it may be best to wait until the trend is definitively reversed before investing again.
How Long Does a Bear Market Last?
It’s tough to say how long a bear market lasts, as the length can vary. Some may last only a few months, while others can go on for years. Yardeni Research shows that the average bear market cycle lasts 388 days or a little over a year. The shortest bear market period for stocks recorded was the 2020 dip, which lasted only for 33 days.
What to think about when investing in a bear market
The bear market is a scary time for investors. Stock prices are falling, and there is a sense of panic in the air. But it is important to remember that bear markets are a normal part of the investing cycle.
When investing during a bear market, there are a few things you should keep in mind:
Have a Plan
Fight off the urge to sell everything and think carefully about your investment goals. What are you trying to achieve? How much risk are you willing to take? Having a plan will help you stay focused and make decisions based on your goals instead of emotions.
Consider Automated Trading
Automated trading systems can help take the emotion out of investing. When you have a plan and set parameters for your investments, you can let the system do the work for you. This can be especially helpful during a bear market when it’s easy to make impulsive decisions based on fear. Curious about automated trading? Check out the BOTS App! It has a wide range of automated strategies for you to choose from. Start your automated trading journey by finding out more about how the BOTS App works.
Focus on Value and Quality
Bear markets provide an opportunity to buy quality assets at a comparatively lower cost. When stock prices are falling, it can be tempting to chase after penny stocks or hot tips. But remember that there is a reason why these assets are cheap—they may not be worth your investment. Instead, focus on finding quality companies for your trading needs.
Avoid Timing the Market
Market timing refers to the act of trying to buy or sell an asset based on predictions about the future direction of the market. It is a difficult—and often a costly—task. It is impossible to know when the bottom of a bear market will be. If you try to time the market, you are more likely to sell in a panic and buy back in at the top. Instead, you could focus on buying quality assets at a lower cost and try holding them for a longer term.
Diversify your Portfolio
One of the best ways to protect yourself in a bear market is to diversify your portfolio. This means investing in a mix of assets, including stocks, bonds, cryptocurrency and cash. That way, if one asset class is struggling, you generally have others to fall back on.
Bear markets can be frustrating, but it is important to be patient. Remember that these periods of market decline are normal and they will eventually end. If you stick to your plan and focus on quality investments, you will be well-positioned to take advantage of the next bull market.
This blog is for educational purposes only. The information we offer does not constitute investment advice. Please always do your own research before investing.
Any views expressed in this blog and by BOTS do not constitute a recommendation that any particular cryptocurrency (or cryptocurrency token/asset/index), portfolio of cryptocurrencies, transaction, or investment strategy is suitable for any specific person.