Individual stocks or commodities can also be deemed to be in a bear market if they undergo a loss of 20 percent or more over a prolonged period of time — generally two months or more. A broad economic downturn, such as a recession, may also be accompanied by bear markets. Bear markets may be contrasted with bull markets that are on an upward rising trajectory.
The Roots of a Bear Market
The most common reason of a bear market is investor anxiety or uncertainty, but there are several more possibilities. While the most recent 2020 bad market was sparked by the worldwide COVID-19 epidemic, other previous reasons have included extensive investor speculation, reckless lending, oil price fluctuations, over-leveraged investing, and more.
A Bear Market’s Stages
Bear markets often have four distinct stages.
- The first phase is distinguished by high pricing and strong investor sentiment. Toward the conclusion of this period, investors begin to exit the markets and collect winnings.
- In the second phase, stock prices begin to decline quickly, trading activity and corporate earnings begin to plummet, and previously favorable economic indicators begin to fall below average. As mood begins to deteriorate, some investors begin to panic. This is known as capitulation.
- In the third phase, speculators begin to enter the market, increasing some prices and trading volume.
- Stock prices continue to fall in the fourth and final phase, albeit at a slower pace. Bear markets are giving way to bull markets as cheap prices and positive news re-attract investors.
In a bear market, how do you invest?
Bear markets are undoubtedly frightening for investors, and no one loves seeing the value of their portfolios plummet. On the other hand, while equities are selling at a discount, they might be chances to put money to work for the long term.
- During a bear market, one of the worst things you can do is respond too quickly. An investor’s tendency to move in and out of positions too fast is the main cause of his or her underperformance over the long haul.
- It’s a fact that many firms go out of business when the market is in a downturn. Overleveraged firms and those without significant competitive advantages tend to be struck the hardest during economic downturns, whereas high-quality enterprises tend to do well. When the economy is in flux, it’s vital to focus on firms that have stable balance sheets and clear, sustainable competitive advantages.
- During downturn markets, one thing to keep in mind is that you won’t be investing at the bottom. Rather than attempting to timing the bottom and investing all of your money at once, a wiser strategy during a bear market is to gradually increase your stock investments over time, even if you believe prices are as low as they will go. If you’re incorrect and the stock continues to decline, instead of sitting on the sidelines, you’ll be able to profit from the new lower pricing.
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