Have you ever seen the bronze sculpture of the Charging Bull in Manhattan? Sometimes referred to as the Bull of Wall Street or the Bowling Green Bull, it represents the hopes for the stock market. Why a bull? In battle, a bull uses its horn to thrust upward, representing the best of what the stock market can do when prices rise and everybody makes money. On the other hand, a bear uses its claws to swing down.
Despite being a normal part of the market cycle, the bear is sadly neglected and not represented. This is likely because a bear market occurs in periods of decline.
As of the close of markets on Friday, May 13th, Nasdaq was down more than 26% compared with the November 2021 peak.
What is a bear market?
Specifically, a bear market is when the stock market falls by 20% or more from its peak. It’s called a bear market because it’s said to be like when a bear attacks its prey, sudden and extensively damaging.
The history behind the term
While there are a few different origin stories, the term “bear market” has been around for centuries. It’s thought to have originated in London in the early 1600s when bear skins were being bought and sold. At that time, there was a lot of speculation in the bearskin market. Prices would go up and down depending on supply and demand.
When the market crashed, it was said that the bears were in control, so the phrase bear market came to be used to describe a market in which prices are falling.
What causes bear markets?
There is no single cause of bear markets, but economic recessions, high interest rates, or political uncertainty often trigger them.
What are the characteristics of bear markets?
Falling stock prices and investor pessimism characterize bear markets. During bear markets, it’s common for investors to sell stocks and move into cash or other safe-haven investments.
There can also be bear markets in other asset classes like cryptocurrency or NFTs.
How long do bear markets last?
The duration of bear markets varies; they can last for months or even years. One of the most recent bear markets in the US stock market lasted from October 2007 to March 2009, nearly 17 months.
What happens during bear markets?
Stock prices tend to fall across the board during bear markets, leading to widespread investor losses and reduced economic activity. Bear markets can also cause a decline in consumer and business confidence, further contributing to economic recession.
What should you do during a bear market?
If you’ve invested in the stock market, it is important to remember that bear markets are a normal part of the investing cycle. While bear markets can be painful in the short term, they provide opportunities to buy lower-priced stocks.
How to avoid losses in a bear market
There are several things you can do to protect your portfolio from bear market losses:
- Diversify your investments. Don’t put all your eggs in one basket. Invest in various asset classes, including stocks, bonds, crypto, and cash.
- Have a long-term investment horizon. Bear markets are usually temporary, so if you can afford to wait it out, you may be able to ride the market back up.
- Use stop-loss orders. These can help you limit your losses if the market falls.
- Invest in bear market funds. These mutual funds are designed to perform well during bear markets.
How to cope with investing during a bear market
If you’re already invested in the stock market, there are several things you can do to help weather the storm:
Selling everything when the market is falling can be tempting. In fact, it’s pretty standard to freak out with market fluctuations, but try to stay calm and stick to your investing plan.
Review your portfolio
Review your portfolio: make sure that your portfolio is still diversified and that you’re comfortable with the risk level by asking yourself the following questions:
- Are you investing for the short term or the long term?
- What’s your risk tolerance?
- And most importantly, are you confident in your investment plan?
You may want to consider investing in a bear market if you have cash available. While risk is involved, there is also a potential for higher returns.
Bear markets can be scary, but if you understand what they are and how to deal with them, you can help minimize your losses and make it through to the other side.
Bear markets can still impact your finances if you’re not invested in the stock market. For example, bear markets can lead to a decline in business activity and job losses. If you are concerned about how a bear market may impact your finances, it’s a good idea to speak with a financial advisor or money coach.
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