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The Dow Jones Industrial Average officially fell into what investment professionals call a bear market in September 2022. That means that the DJIA declined by at least 20% from its most recent high.
If you’re new to markets, big bear market declines can seem scary. That’s why it’s important to understand that the stock market is cyclical, and big ups and downs are normal parts of the economic cycle.
Bear Market Definition
When the economy is on the back foot, investors tend to be pessimistic and stock prices decline.
Economists define a bear market as a decline of 20% or more of a major stock market index, such as the DJIA or , for a sustained period. A bear market is the opposite of a bull market, a period marked by market gains of 20% or more.
On average, bear markets occur every 3.5 years, usually lasting for several months.
Characteristics of a Bear Market
There are always ebbs and flows in the stock market. A bear market is signaled by the following characteristics:
- Stock market declines. In a bear market, there are sustained decreases of 20% or more in broad market indexes.
- Economic decline. The broader economy is typically weakening when stock markets enter a bear market. This is characterized by rising unemployment, decreased gross domestic product (GDP) and declining corporate profits.
- Negative sentiment. During a bear market, market sentiment is poor. Investors are pessimistic about the stock market’s prospects, making them more likely to sell assets than hold them. Investors are likely to put their money into safer investments like bonds because of concerns about future market performance.
- Duration: A bear market is more sustained than typical drops in the stock market. To be in a bear market, the decline has to last for at least two months. Bear markets last for about 10 months on average.
Bear vs Bull Market: What’s the Difference?
While bear markets signal a time of pessimism and economic decline, a bull market is defined by optimism and economic growth. A bull market is a period when stock prices are rising and investor sentiment is positive.
| Bear Market | Bull Market | |
|---|---|---|
Characteristics | • Higher unemployment | • Low unemployment |
Performance | Stocks down 20% | Stocks up 20% |
Average Duration | 10 months | 3 years |
During a bull market, stocks in a broad market index increase in value by 20% or more. Bull markets are marked by low unemployment rates, a booming GDP, high levels of growth and corporate expansion. Investors are more likely to hold onto their portfolios and buy additional stocks.
Bull markets tend to be longer in duration than bear markets. The average bull market duration is three years; the longest lasted for 11 years.
How to Invest in a Bear Market
Seeing the value of your portfolio decline sharply can be distressing, but it’s important to remember that bear markets are normal. The stock market is cyclical, so while it may be tempting to sell your stocks when the market is down to protect some of your money, that strategy could hurt you over the long haul.
If you sell your stocks during a bear market, you may miss out on the rebound that typically happens after the market reaches its lowest point. If you need to sell your stocks to access cash, you may have to sell them at a loss.
Historically, the stock market has recovered from bear markets and produced positive returns. The average annual return on a stock portfolio between 1926 and 2021 was 12.3%.
If you’re a new investor, you may be tempted to sell your stocks when the market starts to decline. However, bear markets are typically temporary, and investors that stay the course and hold onto their stocks during a bear market are typically rewarded for their patience.
Tips for Managing Your Portfolio in a Bear Market
If this is the first time you’ve experienced a bear market as an investor, it can be a nerve-wracking experience. However, there are some things you can do now to help manage your portfolio and protect your investment.
- Diversify your portfolio. One of the best ways to manage risk in your portfolio is diversification. This means investing in a range of different asset classes. When you diversify your portfolio, you can help offset losses in one investment with gains from another. Investing in index funds can be an easy way to diversify your portfolio without having to spend a significant amount of time actively managing it yourself.
- Don’t sell. One of the worst things you can do during a bear market is to sell assets. Instead, focus on your long-term goals. If your goal is several years away, such as retirement, the best course is to hold onto your investments so you can profit from the inevitable market rebound.
- Dollar-cost averaging. Many people postpone investing until the market shows signs of improvement. However, timing the market is difficult, and even highly-paid experts fail at it. Instead, use a strategy like dollar-cost averaging where you invest fixed sums of cash at regular intervals. Over time, dollar cost averaging can lower your investment costs and help you build a diversified portfolio.
- Adjust your asset allocation. As your needs change, it’s important to revisit your asset allocation and make sure it still aligns with your goals. For example, if you have a longer time horizon, you may be able to afford more risk in your portfolio. However, if you’re nearing retirement, you may want to take a more conservative approach with lower-risk investments, such as bonds and money market mutual funds.
- Consult with a financial advisor. It’s completely natural to feel anxious or uncomfortable during a bear market. If you’re worried about your portfolio’s strengths or are stressed about meeting your future financial goals, consider meeting with a financial professional. They can review your finances and investment portfolio and help you develop a plan to protect your money.
