Bear Market Guide: Definition, Phases, Examples & How to Invest During One

Since people can’t control when they get sick or what ailment(s) they’ll develop, there’ll always be steady demand for prescription medicine, medical devices, healthcare products and services. People don’t simply stop getting sick or needing care because of a bear market, which is why J&J is able to grow its adjusted earnings nearly every year. Edging into the stocks you like over time can allow you to build up a position without the regret of feeling like you bought in too early or at a disadvantageous price. The problem with a bear market is that you can never tell whether you’re at the beginning, middle, or end of it. Imagine putting all your investable funds into a bear market that just got underway.

There have been 27 corrections in the S&P 500 since World War II, with an average decline in the index of 13.7%. If you find your stocks have P/E ratios less than those you analyze from the S&P 500, you may want to reduce risk in your portfolio. Dividend stocks also tend to be somewhat less volatile than the average stock, giving your portfolio some extra protection that way, too.

“Bear” and “Bull”

The most conservative type of annuity to buy is a fixed annuity. Unlike variable annuities, fixed annuities aren’t linked to stock market performance. Investing during a bear market doesn’t have to be complicated. Staying diversified, maintaining a long-term perspective, being mindful of risk tolerances and avoiding poor investment behaviors are the keys to success. The bear market of 2022 was sparked by high inflation, which forced global central banks to tighten monetary policy to cool off price gains.

You may want to begin preparing your portfolio for bear and bull markets before they begin, rather than waiting until you know for certain a bear market has begun. You should work to build a strategy and portfolio structure before you begin to buy funds. The best financial advisors can help you make smart investment decisions during a bear market to help you reach your short-term and long-term goals.

What Investments Work in Bear Markets?

Yet, staying invested through thick and thin led to an excellent outcome. Inverse exchange-traded funds (ETFs) also give investors a chance to profit from a decline in major indexes or benchmarks, such as the Nasdaq 100. When the major indexes go down, these funds go up, allowing you to profit while the rest of the market suffers. Unlike short selling or puts, these can be purchased easily from your brokerage account. The most important thing to keep in mind during an economic slowdown is that it’s normal for the stock market to have negative years—it’s part of the business cycle. If you are a long-term investor (meaning a time horizon of 10+ years), one option is to take advantage of dollar-cost averaging (DCA).

Only with the discipline of staying invested through thick and thin will you benefit from the power of compounding over the years. Even the best-performing portfolios don’t go up in a straight line. Investing is all about grinding through good and bad times with a mindset that remains onward and upward. Whenever a new sell-off occurs, we are all back in the grind, trying to get our accounts to all-time highs. While setbacks always feel painful, rising to the challenge is critical.

Hedging Risk

Similarly, no one knows where the stock market is going from day to day or year to year. In December, the vast majority of Wall Street forecasters said the stock market would deferred revenue vs accrued revenue rise in 2022. But if you rely on the emotions of strangers to set prices for you, you can also lose a lot of money when the market falls, as it has been doing lately.

• There have been 27 corrections in the S&P 500 since World War II, with an average decline in the index of 13.7%.
• Of the officially recognized bear markets, the durations were longer than one year but less than two years.
• Bonds are debts issued by companies as well as states, municipalities and national governments.
• Before you start, kick the tires on your financial plan, to make sure you’re ready.
• You’ll often hear about how it took almost 16 years for Microsoft (MSFT) to regain its 1999 high.

And if you did, you wouldn’t be here to learn that some option trades can make the smart or lucky speculator money in a bear market. You’d already know that put options or put spreads, especially those bought after a bear market rally, can be used to hedge long positions or acquired for a speculative trade. Even if it doesn’t earn much yield, it represents a reserve of buying power that can be quickly marshalled as the bear market presents opportunities. If you regularly invest a fixed sum in stocks, whether through a 401(k) or a Roth IRA, you will end up buying more as market prices go down and less as they go up, tilting the odds modestly in your favor.

Buy Defensive, Dividend-Paying Stocks.

In fact, given that most bear markets last less than 18 months, it may be a good time to resist selling your long-term investments. One of the most notable bear markets to not be followed by a recession occurred during the stock market crash of 1987. Within two trading sessions, the Dow had recovered 57% of its Black Monday losses. A bear market is defined as a prolonged period in which investment prices plummet at least 20% or more from their most recent high. The opposite of a bear market is a bull market, a buoyant period of rising prices. Because stock markets can suffer frequent declines of 5% or more, investors often don’t realize a bear market has set in until their losses go well past that point.

Borrowing from Peter Thiel in his book Zero to One, I discussed the idea of only investing in companies that have the potential to beat all of your other investments combined. While this idea may sound romantic at first, it can be very effective. A thesis should not depend on what could happen within hours or minutes. If bad news comes out and a stock you own is down 50%, you don’t have to sell that day, even if your bullish thesis is broken.

There are a few competing theories of where the terms bull and bear markets came from. One is from the fact that bulls tend to attack by goring their horns upward; bears, instead, often attack by bringing their claws downward. Another theory argues that the term “bear” originates from the early fur trade, where bearskins were seen as particularly risky commodities in terms of their price and durability.

All hedges have a price, whether it’s expressed in the form of the option premium paid or, less obviously, the cap on an annuity policyholder’s maximum return. Diversification and de-risking of an equity portfolio can provide comparable benefits at a lower cost. While riskier stocks are never more so than during a bear market, there is evidence they also haven’t outperformed safer ones in the long run.

When the Fed starts to raise rates, it means the economy is healthy and maturing. Meaning, this happens toward the end of a bull market, and closer to the bear market. Most investors in retirement accounts like 401(k)s and IRAs will do well to stay put in their investments.

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Another reason dollar-cost averaging is such a smart strategy is because the major indexes tend to increase in value over time. If you took the above data from Crestmont Research to heart and put dollar-cost averaging into action, you’ll have a really good chance to build wealth over time. If anything, history seems to have favored the bulls in the broader U.S. stock market. Say the price of a stock in your portfolio slumps 25%, from $100 a share to $75 a share.

What Not To Do in a Bear Market?

Watching your money disappear as a bear market takes hold is not something that comes easy to the human spirit. Numerous studies on loss aversion explain why many investors tend to give up when things are at their bleakest. When the eventual rebound comes, the investors that sold fail to participate in the recovery. If you want or need to liquidate your stocks, it may be tempting to do it all at once.

Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. Alternatively, you could opt for ETFs that focus on stocks with lower volatility, like Invesco S&P Low Volatility ETF (SPLV). It’s packed with slower moving stocks from the energy and financial sectors. You might still take a haircut to your portfolio in a bear market, but it will usually be less.

Bear markets are often triggered by an economic downturn — a contraction phase in the business cycle. Negative news or events can also cause stocks to change course. Recessions are officially announced by the National Bureau of Economic Research (NBER) but are generally defined as a drop in gross domestic product (GDP) for at least two quarters. Although the two often move in tandem, it’s possible, though rare, to have a bear market without a recession, and vice versa.

They also tend to be less statistically severe, with average losses of 33% compared with bull market average gains of 159%, according to data compiled by Invesco. A bear market is a good time to assess whether your portfolio’s asset allocation really suits your risk tolerance. It’s simply a matter of which assets carry the greatest risk right now. While bonds are less volatile than stocks, they can also experience prolonged drawdowns and losses. It’s entirely possible, albeit rare, for stock and bond bear markets to occur simultaneously. Most recently, the Dow Jones Industrial Average went into a bear market on March 11, 2020, and the S&P 500 entered a bear market on March 12, 2020.

• Investors who hold bonds can generally expect to receive payments over an agreed-upon time frame.
• For short-term savings, a bank account or money market fund makes sense because your money will be secure and you can get hold of it quickly.
• One of the most notable bear markets to not be followed by a recession occurred during the stock market crash of 1987.
• So if we are currently going through an average bear market, we’ll reach the bottom toward the end of 2022, and we’ll be back at the previous high by July 2023.

Utilities are another sector that tends to perform well during market downturns. Although investors fear bear markets, they are fortunately often short-lived. What follows are four top-tier growth stocks you’ll regret not buying in the wake of the Nasdaq bear market dip. The past few years have been a good test of investors’ tolerance for risk.