What Is a Bear Market?

If you turn on the news and all you see during the markets segment is down arrows, panicked analysts, and red financial indicators, we might be in a bear market.

A bear market is when investments seem to only go down in price and the financial news feels like a doomsday movie.

While it’s always a good idea to keep investing, is that really the case in a bear market? Short answer: yes.

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Bear Market Definition

A bear market is defined by the Securities and Exchange Commission as “a time when stock prices are declining and market sentiment is pessimistic.” 

The SEC goes on to add, “Generally, a bear market occurs when a broad market index falls by 20% or more over at least a two-month period.”

When stocks drop that significantly, investors aren’t feeling too hot — so market sentiment is very poor.

There have been 15 bear markets since 1942, according to research from First Trust. During that period, the average bear market only lasted about 11 months and prices declined about -31.7% from top to bottom.

While a bear market is officially recorded when the overall stock market drops by 20%, some markets drop by 50% or more. 

The longest bear market during this timeframe was only 1.7 years. This may sound scary, but considering the longest bull market (stocks going up) was 12.3 years, a 1.7-year bear market doesn't seem that bad.

READ MORE: Investment Terms to Know If You’re a Beginner Investor

Characteristics of a Bear Market

Bear markets are usually measured by tracking the performance of a market index such as the S&P 500 or the Dow Jones. 

When a stock market index drops in value by 20%, news outlets broadcast that we’re in a bear market.

There are a few definitive characteristics of a bear market:

• Risk of recession (although not always), as a steep decline in market prices can pull prices into a bear market.
• Pessimistic consumer sentiment, with people nervous about investing and thinking things are only going to get worse. 
• Risk of layoffs and a rise in unemployment, further putting a damper on the market’s overall mood.

Bear markets can have positive returns, though, as so-called “relief rallies” could see stock market prices increase by up to 10% or more. But the overall movement of prices and production is down.

Bear market vs. bull market

Bear markets are when the stock market drops by 20% from recent highs and stays there for a few months. A bull market is the opposite — the stock market price rises by 20% and stays there for a few months (at a minimum).

While bear markets are typically tied to recessions and poor consumer sentiment, bull markets are defined by an optimistic approach to investing and more people participating in the market.

Bear markets typically result in layoffs, low company profits, and some companies may even go out of business. On the flip side, bull markets are marked by increased corporate profits, rising share prices, and low unemployment.

How To Invest in a Bear Market

Standing face-to-face with a bear can feel scary, but a bear market may offer some of the best investment opportunities. 

Here are a few tips on how to invest in a bear market:

Keep a long-term investment approach

Investing during a bear market can be unnerving. You put money in your 401(k), and the next week you have less money. Stocks drop. And the media seems to have bad financial news on repeat.

But if you zoom out and look at how most bear markets end up, you’ll see they usually last less than a year — and are followed by huge gains over four years (on average) in subsequent bull markets. 

If you invest in diversified assets that have a long-term track record, bear markets end up just being a blip on the radar of your investing journey.

READ MORE: Long-Term vs. Short-Term Investment Strategies

Invest in recession-proof market sectors

Bear markets usually coincide with an economic recession. But some market sectors are more resilient than others during a bear market. 

Choosing a market sector exchange-traded fund (ETF) in more “recession-proof” industries can help lower portfolio volatility and might even boost your investment growth.

Investing in ETFs or companies that are necessary — think “needs” and not “wants” — can keep revenue coming in, even when consumers pull back on other purchases. 

Market sectors like consumer staples and utilities thrive in bear markets, as many investors cycle holdings into those investments during bear markets. 

Commodities like gold can also see a boost amid market uncertainty, as many move funds to “safe haven” assets.

READ MORE: What To Do When Your Stocks Are Losing Money

Just keep buying

Bear markets present one of the best opportunities to continue buying solid investments — but at a discounted price. 

If you have a strong conviction in what you’re investing in, a bear market is simply a way to lower your purchase price on your favorite assets.

Whether you’re looking to purchase more broad-based index funds or want to find real estate at a heavy discount, just keep buying during a bear market to grow your portfolio even faster.

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Rebalance your portfolio

Once you are in a bear market, your investment portfolio might drift away from your preferred allocation. 

For example, if you prefer to hold 70% stocks and 30% bonds, the stock market might drop quite a bit while bonds may be less affected. This could push your portfolio to 60% stocks and 40% bonds.

You can rebalance your portfolio to get back to your desired 70/30 split in a few ways. You can simply keep buying more stocks to get back up to 70% or you can sell some bonds and purchase stocks to rebalance immediately. 

The benefit to rebalancing in a bear market is buying stocks at a lower price while selling assets that have held their value a bit better than the overall market.

What Not to Do During a Bear Market

It may be tempting to try to beat the market, but research suggests this may be a poor approach to investing. 

Here are a few things you should avoid doing in a bear market: 

Don’t panic sell

Bear markets can be emotional for investors, especially if you have built up a sizable portfolio. 

Watching your investments drop by 20% (or more) may make you want to get your money out of the market for a while. But history suggests this would only compound your losses.

Selling when the market drops can hurt you in multiple ways:

• You sell at a loss.
• You don’t buy back into the market and miss out on gains.

If you’re a long-term investor and have chosen assets you believe in, you don’t lose money if you don’t sell. Yes, stocks can go to zero, but those are typically high-risk assets not associated with a long-term investment approach.

Instead of trying to time the market and avoid your investments dropping, just keep buying on the way down and on the way back up — and your portfolio will grow in the next bull market.

READ MORE: Active vs. Passive Investing: Which Is Best?

FAQs

Is a bear market good or bad?

A bear market may seem bad, but if you have a solid investment approach and a longer time horizon to retirement, it can be a very good thing. 

Bear markets are a reality of investing in the stock market — and if you continue investing as prices drop, you can significantly lower the price you pay for your long-term investments. 

They also last less than a year on average and are preceded and followed by bull markets that more than make up for the losses. 

So, while bear markets can be bad if you panic sell or avoid the market, they can be wonderful wealth-building opportunities. 

Should you buy or sell in a bear market?

Bear markets are a good buying opportunity if you’re a long-term investor. 

A bear market means that investment prices drop by 20% or more — if you have conviction in your investments, purchasing more at a lower price can be an incredible deal. 

If you are in retirement and need to start selling investments, you may lose a little money — but a bear market should be baked into your financial plan in the first place.

TL;DR: Investing in a Bear Market

A bear market is when the stock market is down and consumers are feeling pessimistic. There may even be a recession or high unemployment.

While bear markets can cause a lot of panic, there’s no need to sell off all your assets. Instead, keep steadily investing with long-term goals in mind. Bear markets are usually fairly short and usually bounce back with a longer bull market.

For more investing insights, check out these episodes of the Erika Taught Me podcast:

• Investing in the Stock Market Explained: A Guide for Beginners
• Why Getting Rich is Easy and Being Patient Is So Hard
• The Missing Piece in 99% of Financial Advice

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