“I don’t know. I feel kind of bearish.”
If you hear one of your investor friends say this out of context, it might sound like they’re hungry. Or hairy. Or willing to help Leonardo DiCaprio win an Oscar The Revenant.
But in the world of investing, “bearish” means something else entirely.
A bull or bear market is not as simple as a good market and a bad market. It’s a bit more nuanced and once you learn the key differences, you can start investing much more effectively.
What is a bear market?
If you’ve read anything about bear markets or simply seen the headlines lately, you probably assumed it wasn’t such a good thing. Almost like running into a bear in the woods.
Actually a a bear market is when prices are falling.
A special definition is when the S&P 500 falls 20% from its most recent high. Looking at index prices over the last five years, I bet you can spot when we entered bear territory:
The reason investors use the S&P 500 to identify bear markets is because the performance of the S&P 500 is generally considered to be a reflection of the larger markets as a whole.
Now, if a bear market is an objective metric – not a sentiment – why did your friend say he felt “bearish”?
In the world of investors, “bearish” is synonymous with pessimistic. So if your friend says he’s bearish on Tesla stock, for example, that means he thinks prices will start (or continue) to fall.
Why is it called a “bear” market?
Nobody knows for sure.
Some say the term originated centuries ago when brokers selling bear skins would pre-sell them to customers in the hope that prices would drop when the hunters actually arrived with the product. You could sell at £10 in January, buy for £3 in May and pocket the difference for a good product.
This is one theory about how the term “bears” came to mean the expectation that prices would fall.
But others say The terms “bear” and “bull” come from the simple fact that bears attack downward and bulls attack upward.
Are we in a bear market?
Yes, we are in a bear market right now. The S&P 500 started falling in January 2022, and the bear market was mathematically confirmed on June 13.
How common are bear markets?
Bear markets are quite common. On average, they appear every 56 months (four years, eight months).
What is a Real Estate Bear Market?
While the term “bear” usually refers to the stock market, it can also apply to other markets.
For example, a real estate bear market is when home prices fall by 20%. And unlike bear markets for stocks — which happen about every four years — there has only been one real estate bear market in the past 20 years.
I bet you can guess when:
What causes a bear market?
Many factors usually play a role in falling markets. In 2022 these include (but are certainly not limited to):
- Residual economic side effects of the pandemic
- Rising interest rates
- Fear of another recession
- Pending Crypto winter
- Unexpectedly high inflation
- The war in Ukraine
All these factors make people nervous that the markets will fall. They create bearish sentiment, less investment, falling prices and more bearish sentiment.
How long does a bear market last?
Historically, the average bear market has lasted nine months.
This means that the current bear market – which began in January and was confirmed in June – could start to turn around as early as October.
So what should you be doing during this time?
How to invest during a bear market
Bear markets can be an exciting investment opportunity, but like actual bears, they should be approached with caution and careful planning.
Many investors simply leave bear markets (and bears) alone. They take a “drink a pint and wait it all out” approach and neither buy nor sell.
This is because they know the markets will eventually recover. A century of historical data shows us that the S&P 500 will always recover and make new highs. So holding on is a 100% viable strategy and you shouldn’t feel FOMO about letting your investments sit.
The the worst the thing you can do during a bear market is to sell. Unless you absolutely need that money, leave your investments alone. Because even though your stock may have gone from $100 to $50, it could be back to $125 in a matter of months.
Remember, seeing red in your portfolio doesn’t mean you’ve lost money. You only lose money if you sell at the wrong time.
On the other hand, small, calculated purchases during a bear market can actually be a smart move. So let’s discuss strategy!
Is a bear market really a “sell-off” in stocks?
You’ve probably heard a bear market referred to as a “sell in the stock market.” There’s some truth to that idea, but that doesn’t mean you should go shopping just yet.
The truth of this idea comes from the fact that again, the stock market always returns. So if a blue chip stock (even a reliable one) like Microsoft was at $330 and dropped to $250, now would be a good time to buy before it very likely goes back to $330 and above.
Still, here’s why many investors don’t buy into bear markets:
- We don’t know when the markets will recover. Microsoft could also continue to fall to $200 and stay there for months or years.
- … and if you have to sell during this time, you are SOL. You probably shouldn’t tie up money you might need in the near future in an unpredictable bear market.
If you want to invest safely Consider this strategy during a bear market:
1. Calculate your risk tolerance
Your risk tolerance will dictate how much you can (and should) invest during a bear market. You can find out your risk tolerance by taking my 10 multiple choice quiz here.
One of the main factors in risk tolerance will be your horizon, or how long you can afford to keep your money tied up. For example, if you want to buy a house in 18 months, you may not want to risk investing in a bear market.
2. Hedge your risk by dollar cost averaging
Dollar cost averaging is a fancy term for investing a little at a time. So instead of buying $1,200 worth of Microsoft today, buy $100 with each month’s paycheck over the course of a year.
DCA allows you to buy from average price over a period of one year, helping you hedge against the risk of overbuying.
3. Consider index funds and savings bonds I
Index funds they allow you to effectively invest in the entire stock market with a single click, so they are the secret to making riches easily. You can buy them just like normal supplies Robin Hood or TD Ameritrade.
Government savings bonds I, or I bonds, offer an APY that matches the rate of inflation. So if inflation is extremely high during a bear market, they are a smart buy.
For example, if you invest up to $10,000 in I Bonds before November 2022, you’re guaranteed to earn 9.62% interest for six months.
Advertiser Disclosure – This advertisement contains information and materials provided by Robinhood Financial LLC and its affiliates (“Robinhood”) and MoneyUnder30, a third party not affiliated with Robinhood. All investments involve risk and the past performance of a security or financial product does not guarantee future results or returns. Securities offered by Robinhood Financial LLC and Robinhood Securities LLC, which are members of FINRA and SIPC. MoneyUnder30 is not a member of FINRA or SIPC.”
4. Stick to good investment principles
It is best not to enter a bear market (or any market) with the goal of getting rich in the short term.
This is because timing a bear market is almost impossible. And just because the market is healing doesn’t mean it will bring all individual stocks with it.
A good investment doesn’t change during a bear market — it just represents an opportunity to buy a little more on a sell-off. So instead of trying to find the next supply of memes to go to the moon, it’s better to watch r/wallstreetbets from afar and stick to the same proven principles of good investing:
- Know your risk tolerance
- Make it 90% “boring” (bonds, ETFs, index funds) and 10% “exciting” (stocks, crypto)
Before we wrap up, let’s also cover bull markets. Because one day soon we will be in one!
What is a bull market?
A bull market is the opposite of a bear market. In monetary terms, this is when the S&P 500 is up 20% from recent lows.
Colloquially, the terms “bull market” or “bullish” can refer to any market, index, or individual security. You can feel bullish (or bearish) about a particular stock, real estate market, etc.
Why is it called a “bull” market?
Some say the term emerged from the London Stock Exchange in the nineteenth century, a full century after the “bear market”. When traders felt confident about a particular stock, they pegged it to the bulletin board – hence “bullish”.
Still, others say it’s just because bulls attack up and bears attack down.
How long does a bull market last?
Fortunately, bull markets tend to last much longer than bear markets: an average of 3.8 years, according to Kiplinger.
We recently had the longest bull market in history, from 2009 to 2020. It probably would have lasted even longer if it weren’t for that pesky pandemic!
How to invest in a bull market
In general, there are two ways intrepid investors try to capture a bull market:
- They buy early before prices become inflated.
- They sell high before prices peak.
But timing a bull market can be tricky. While markets generally always recover, some individual stocks may never return to their bullish peaks (see Macy’s or Norwegian Cruise Lines).
In the end, it’s okay to skip the FOMO and let the bull and bear markets come and go. You don’t have to rush out and buy certain stocks before it’s “too late.” You have plenty of time to let your wealth grow, and a steady diet of index funds and the occasional blue chip will keep your portfolio healthy, regardless of market conditions!