Many investors shudder when they hear the phrase "bear market." However, these profound market downturns are inevitable and generally short compared to the duration of bull markets, when the market is gaining in value. When the market is in a downturn, it's possible to make money.
What Is A Bear Market?
A bear market occurs when the price of a stock drops over an extended period. Pessimism and negative investor sentiment often accompany a 20 per cent or more decline in the price of a security from its most recent high.
Individual stocks or commodities might be in a bear market if they undergo a fall of 20% over a prolonged period—typically two months or more—instead of just the entire market or index. A recession or other economic slump may also lead to bear markets. Upward-trending bull markets can be contrasted with bear markets.
How Long Do Bear Markets Last?
A downturn in the stock market generally precedes or follows the onset of an economic downturn. Economic indicators such as hiring and wage growth, inflation and interest rates are closely monitored by investors to warn that the economy is slowing down. Some of the indications in the COVID-19 pandemic were slightly different.
Several indicators indicated that the economy was on the verge of collapses, such as extensive closures, surges in jobless claims, and social isolation measures. Investors predict business earnings to drop shortly when the economy is weakening. This causes the market to fall since they are selling their stocks. A bear market may lead to an increase in unemployment and a worsening of the economy.
Investing in a Bear Market
Even though bear markets can be frightening, they also present investors with many possibilities. If you know where to search, you may locate excellent investment possibilities or, at the very least, keep the ones you currently have. Here are several ways to keep your investment goals tact during a down market.
Resist the impulse to sell everything
Sell everything and convert all of your investments into cash. However, this may not be the best long-term strategy for protecting your money. It may not make much difference if inflation or interest rates are low.
Since bear markets seldom endure more than a few months, the money you'd have to wait on in times of high inflation might be worse off than you think. It's crucial to resist the temptation to sell everything at the first hint of a headwind in a bad market.
Defensive investing
Another option is investing in defensive companies or funds that have historically performed well during downturns. Regardless of the current market conditions, these may be in sectors deemed essential.
Food and personal care products are included in this category. Another industry that does well in market downturns is utilities. At times of uncertainty and high-interest rates or inflation, a sensible investor might consider shifting a portion of their portfolio to these assets instead of cash.
Bond hedging
Many people turn to bonds as a haven when the stock market is down. Bond prices tend to move in the opposite direction of stock prices. Thus a decrease in stock prices may benefit a bond investor. In a bear market, short-term bonds might help investors withstand the fall.
Investors looking to protect themselves against the general market risk of a bear market would be better served by higher-quality or investment-grade bonds. It is possible to compound losses in a bear market by investing in more risky bonds than stocks that are already underperforming.
Dividend stock hedging
There are dividend stocks that pay out a percentage of a company's profits back to the investor as an income, even if the stock price decreases. If you're looking to protect yourself from the consequences of a bear market, dividend stocks are a great option. Stocks that pay dividends are also less volatile than the typical stock, which gives your portfolio an added layer of security.
Real-World Bear Market Examples
In October 2007, the soaring problem of mortgage defaults hit the stock market. On October 9, 2007, the S&''P 500 reached a record high of 1,565.15. 9 As the scope and impact of mortgage defaults on the entire economy became obvious on March 5, 2009, and the index fell to 682.55.
On December 24, 2018, the U.S. main market indexes were again near bear market status, falling just shy of a 20% drop. For the first time since March 11, 2020, the Dow Jones Industrial Average and the S&''P 500 were both in bear markets simultaneously.
Conclusion
Despite ups and downs, the stock market has traditionally fared well, even during periods of persistent expansion (bull markets) or fall (bear markets). As you may know, previous performance does not guarantee future success. Managing the ups and downs of the market and achieving long-term success may be easier by having a clear long-term strategy and a well-diversified portfolio.
