- A bear market is a period of a steady drop of 20% or more in the stock market.
- It is not all about losing money; long-term investors can make the most of this situation.
- Buy value stocks at a discount in a bear market.
The stock market is often referred to as a clash between bears and bulls, so you might be wondering, what do animals have to do with stocks? Well, if you think of a bull attacking its prey, you will notice that its horns are typically pointed upwards, while a bear will have its head downward. In the same manner, bulls and bears have an impact on the stock market. The prey is your investment portfolio and it is being attacked in a downward motion. Hence, when this happens, it is called a bear market.
According to the Securities and Exchange Commission, a bear market is a period of at least two months when the market index falls by 20% or more. With the S&P 500 index down 20% from its high, we can say that the market is reaching bear market status. The rising inflation concerns, high-interest rates and average earning reports from companies have led to the current situation.
This is not the first time there has been a bear market. Most recently, a bear market also occurred at the onset of the Covid-19 pandemic and during the financial crisis of 2009.
What Happens in a Bear Market?
A bear market can be a stressful and nerve-racking period, as you have to watch your portfolio slowly drop in value. Since all of us are emotionally driven, we tend to make decisions in panic and this is a normal response. Most of us overreact to bad news, we have seen investors overreacting to a company’s below-average revenue guideline or a dip in user base. It is human tendency, but overreacting can cost a lot to your portfolio. It is not possible to time the market, but do not assume that once the market is in a bearish situation it will continue to drop further.
The bear market is a period of a steady drop in the stock market and you might see your portfolio losing value day after day. But, history shows that each bear market is followed by a bull market, which means you have a solid chance to make up for the losses.
What Should Investors Do in a Bear Market?
As an investor, stressing about the market movement will not give you any results. But there are some things you can do to keep your portfolio steady. This is a time to buy your favorite stocks for less. Long-term investors do not get this opportunity often and you should be making the most of it.
If you are going to put the money into stocks, do it now at a discount. Despite the current collapse, the market will gain in the long term and you will be able to recover the losses.
Bottom Line On Dealing With Bear Markets
There are good days and bad days in our lives. Although the bad days are easier to remember, you need to keep in mind that there can be many good days. There are still solid days for the S&P 500 in a bear market, so do not worry too much and do not try to time the market.
On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.