Post difficulty: Easy/Medium – Bear Markets: 6 Things That You Need To Know
It’s August 2022 and we are in the midst of the second bear market in just over 2 years. Before that was the 2007-2009 financial crisis. What a rollercoaster Covid caused.
What Is A Bear Market?
A bear market is where prices are going down. That’s the straightforward answer.
There’s a little more to it, still straightforward to understand but a bit more detailed.
Ever Wondered Why It’s Called A Bear Market?
There are a couple of theories for where the term originated.
Some say (the historians) it’s to do with how traders back in the 18th century used to bet that the price of bear skins would fall. Thus creating the term bear markets for when prices are falling.
Others say (the poets) it comes from the way a bear would attack.
As much as I love history, I think the poetic version is a much nicer way of explaining it.
Imagine you’re out on a stroll in a deciduous forest, and you decide to take a different path from your usual; you can’t subdue that explorer in you. After a short walk you hear some rustling in the trees, you pause, realising you’ve stumbled across a bear den. You slowly turn to make your get away, as you do you see a wonderful black bear. You realise there’s nothing to worry about here, he hasn’t seen you, his attention is on chasing a bird. You stand back at a safe distance to watch this beautiful creature in action as he stalks his prey. He rises up on his hind legs, with his paws out in front, he swipes down at the prey with dramatic force, you hear a mighty thud as he hits the ground with all of his weight. Unfortunately for the bear it’s the birds lucky day, it was a miss.
Disclaimer: No bears or birds were injured in the making of this blog.
As our bear attacked by standing on his hind legs and then swiping and falling down with his paws, so too do the markets. They rise, known as a bull market (explained in another post), and then they fall, they fall like our bear does when he attacks. Down, hard and fast.
This Is The Nasdaq 2022 Bear Market:
You can see its January peak to March low, then again April’s peak to May’s low confirming the bear market.
Horrible scenes!
The technical definition of a bear market is a 20% drop from the recent peak/high. This doesn’t have to apply to an entire market like the Nasdaq, it could be an individual stock/share that has dropped by 20% from it’s recent high, falling into bear market territory.
What Can Cause A Bear Market?
Many things, ranging from, pandemics, economic turmoil, war, inflation, high debt, or a combination of the above.
Markets change with investors feelings, i.e. investor sentiment.
When people feel negative about a situation they will sell their holdings, this can put pressure on the market, bringing it down. As the market drops it creates further negativity, making more people sell, bringing the market down further. Capitulation at its finest and a vicious circle.
How Long Does A Bear Market Last?
It varies, often depending on the cause and what market you look at.
The March 2020 Covid bear market lasted for about a month. One of the quickest recoveries in the history of bear markets.
A ‘normal’ bear market lasts roughly 1-2 years on average, depending the reason.
How Bad Have Previous Bear Markets Been?
Bad, sometimes really bad.
Remember, to be classed as a bear market it has to drop by 20% initially. That doesn’t mean it will recover once it hits 20%, usually it continues further down, as I said capitulation at its finest and a vicious circle.
The FTSE 100 lost around 30% in 2020 and about 40% in 2007-2009.
The S&P 500 lost around 34% in 2020 and about 56% in 2007-2009.
How Do You Survive When The Bear Attacks?
Investing in a bear market can be difficult and stressful. If you aren’t careful you are likely to lose significant amounts of money.
Firstly, let me tell you that nobody has a crystal ball and can tell you when the bear market will end.
If market prices are falling and you’re seeing your investments drop by 20%/30%/50%, what can you do?
- If your investment plan is for the long term then don’t be hasty, leave it be!
- If you need the cash in the short term, it may be a good idea to take some of it sooner rather than later.
As the bottom can’t be predicted, neither can the coming rally to the upside. Markets have historically always recovered, and if you aren’t in the game then you won’t enjoy the recovery.
Stay invested, if for the long term, and ride the wave. Bear markets happen, they’re common, they don’t usually last too long. It’s a time to keep your cool and wait for the recovery.
Here is another point, you may think I’m crazy, but…
Invest More Money!
What!? You say. My investments are down 30%, why would I want to invest more money.
Hey, I hear you. I’m not crazy I promise, I know it doesn’t sound right, BUT what a difference it could make.
Here are 2 charts from the S&P 500 in the US.
2007-2009 Bear Market And Subsequent Recovery:
2020 Bear Market And Subsequent Recovery:
In both, the subsequent recovery has been strong and over doubled the valued at the bottom.
So these bear markets can often be unique buying opportunities.
It’s often best to buy ETF’s or Index trackers in these situations to avoid specific company risk. Individual stocks may increase more but you just don’t know which ones will, so best to buy them all!
However, if you were to do this, you should only be investing for the long term! As you can see from the charts, it takes time to make these returns.
Also, don’t buy in bulk, phase your money in (weekly/monthly). That way you can average your loss and hopefully produce a better gain.
You May Lose Some Money The Moment You Put It In, So This Technique Isn’t For The Faint Hearted.
If this is a worry for you then I suggest you speak with a financial adviser who should help and settle your nerves.
Be Careful Of Bear Market Rallies, It Could Be A Trap!
Bear markets can often have fake rallies, where they start going up but they fail and fall back down. Again, there’s no way to know 100% but it is something to look out for.
On 27th October 2008 it looked like the bear market was at a bottom, down by approx 45% from its highs in October 2007. The market rallied until the 4th November 2008 gaining approx 15% only to drop another 30% by 9th March 2009.
This is why phasing money into your investments works better than buying in bulk.
Bottom Line
- Bear markets are scary beasts.
- 20% decline from the recent high defines the bear market.
- Historically bear markets last between 1-2 years on average.
- Historically bear markets have dropped by 30%/40%/50%.
- Be careful of fake rallies.
- Stay invested for the long term and ride the wave
- Bear markets provide unique buying opportunities.
- If you do buy, buy passive investments.
- Phase your purchase, don’t buy in bulk.
