Overview of bear markets and investing during one.

Bear markets- what are they and investing during one

The S&P 500 made headlines on May 20th when it temporarily slid into a bear market. As a reminder, a bear market generally occurs when prices fall by 20% or more from recent highs. The index quickly rebounded but is still down by double-digits since the beginning of the year. We can’t predict whether or not we are headed into a bear market, but we can give you some information about them- so you are prepared in any case.

Bears and bulls- what’s the difference?

We’ve probably all heard the terms ‘bear’ and ‘bull’ in reference to the stock markets. But what does that even mean? As mentioned, a bear market occurs when there is a 20% or more drop in prices from recent highs. A bull market is the opposite; it occurs when prices increase by 20% or more from recent lows. Simply put, stocks go up for a prolonged period of time in a bull market, and they go down in a bear.

It’s important to distinguish between a bull market and a bear market rally. Whereas in a bull market where stocks are on a sustained uptrend, a bear market rally is when stock prices temporarily rise after plunging into a bear market before falling again. In this case, it may seem like the bear market is over, but it actually isn’t.

What causes bear markets?

The causes of bear markets can vary, and there can also be a combination of factors pushing the markets down. In general, some of these factors include:

  • A weak or slowing economy
  • Bursting market bubbles
  • Geopolitical crises
  • Government intervention in economic matters
  • National or global events e.g., pandemics or wars

How long do bear markets last?

Stock markets are cyclical in nature; they go up and they go down. According to Putnam Investments, from 31.12.48 to 31.12.21 (a 73-year time frame), the S&P 500 has seen 13 bear markets. While each has been different, and they range widely in duration and severity, on average, they lasted for 13 months and saw a cumulative return of 25.85%.

That may sound scary, but the market has always recovered. During the same period from Putnam’s research, there have been 14 bull markets lasting on average for 50 months and seeing an average cumulative return of 136%.

How to invest in a bear market?

If you are new to investing, you may have never experienced a bear market. We aren’t in a bear market, and we might not go into one, but since we recently briefly went into bear market territory, here are tips to think about when investing during one:

Diversify your portfolio

In general, during a bear market, all the companies within an index, such as the S&P 500, tend to fall. But they might not fall by the same amount. Some companies, industries and even different types of financial products might be more or less impacted than others. Therefore, it’s important to have a well-diversified portfolio to help spread your risk. As they say, don’t put all of your eggs in one basket.

Focus on the long-term

You may be tempted to sell when the markets get rocky. While bear markets can initially cause panic, as mentioned before, they don’t last, and the market will recover at some point. It’s wise to keep your investment plan in mind and your long-term goals.

Consider dollar-cost averaging

Dollar-cost averaging is an investment strategy that focuses on time in the market instead of timing the market. When following this strategy, you invest a fixed amount of money at regular intervals, regardless of the share price. When stock prices are high, you will get fewer shares for your fixed amount of money, and when stock prices are low, you will get more. This strategy, over time, can lower the average cost per share paid compared to if you bought all the shares outright at a higher price, and it also takes emotional factors out of investing.

Investing with DEGIRO

We want to make investing accessible to everyone. We have a simple flat-fee pricing structure and even offer to invest in US stocks commission-free! For details, please visit our Fees page.

We help you spread your risk by offering you access to one of the largest universes and exchanges. You can influence your risk by building a well-diversified portfolio and spreading your investments over different types, regions and sectors. For an overview of the products and exchanges we offer, please visit our Markets page.

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The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.

Sources: Bloomberg, Reuters, Investopedia, Putnam Investments, Nerdwallet, Motley Fool, NYT, NPR

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Note: Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products which match your knowledge and experience.

Note:
Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products which match your knowledge and experience.