When a bear strikes, it uses its claws to swipe downward at its victim. According to one explanation, the name "bear market" comes from this sweeping downward trend. In the realm of investments, the term "bear market" is frequently heard. But what exactly does it imply? It's critical to grasp financial terms and trends as an investor, especially when they may have an impact on your portfolio. In this article, we've covered the key things you need to know as an investor about bear markets.
What Is A Bear Market?
A bear market is when a market experiences prolonged price declines. A 20 percent slide from recent highs is usually considered a bear market. Bear markets are often associated with declines in an overall market or index like the S&P 500. However, the phrase can apply to any stock index or a single stock that has plummeted 20% or more from recent highs. For example, let's imagine a corporation releases terrible profits, and its stock falls by 27%. We might say that the stock's price has dropped into the bear market territory.
Phases of A Bear Market
When a bear market occurs, it usually goes through four stages. In the first phase, high pricing and positive investor optimism occur. However, investors begin to exit the markets and grab profits near the end of this phase, which leads to the second phase. In the second phase, stock prices begin to fall significantly, trading activity and corporate earnings may begin to decline, and previous optimistic economic indicators begin to deteriorate. As investor mood begins to deteriorate, some investors become panicked. Luckily, in the third phase, things begin to turn for the better. The third phase is where speculators start to enter the market, subsequently elevating some prices and trading volume, which leads to the fourth and final phase. In the fourth phase, stock prices continue to fall, but at a slower pace. In this last phase, bear markets begin to shift to bull markets as low prices and positive information re-attract investors.
Causes of A Bear Market
Investor fear or uncertainty is the most prevalent cause of a bear market, although there are many additional variables at play. An external shock can initiate a bear market, such as the recent 2020 bear market, which was prompted by the worldwide COVID-19 pandemic. Bear markets can also arise when the market determines that economic fundamentals are insufficient to support stock values. To summarize, it is not always feasible to forecast when or why a bear market may happen.
Bear Market vs. Market Correction
Bear market and market correction are words that are frequently interchanged. It's crucial to note, however, that the two phrases have different meanings. While there is no commonly acknowledged definition of a market correction, most people believe one has happened when a major stock index falls 10% to 19% from its most recent peak. It's called a correction because traditionally, the fall frequently corrects and returns prices to their longer-term trend.
Investing in A Bear Market
Bear markets are undoubtedly frightening for investors, and no one loves seeing the value of their portfolios plummet. On the other hand, while stocks are selling at a reduction, it might be an excellent chance to put money to work for the long term. Before you go cashing out of the market or investing all your money into cheap stocks, remember these key points:
1. Rember Your Long Term Goals
Bear markets put all investors' resolve to the test. While these times are tough, history indicates that the market will most likely rebound quickly. If you're saving for a long-term objective, like retirement, the downturn markets you'll face will be outweighed by bull markets. Even though it's tough to resist the urge to sell stocks when markets fall, historically, it's one of the best things you can do for your portfolio.
2. Focus on Quality Performers
Buying stocks at discounted prices is one way to invest during a bear market. However, you should proceed with caution. In this market, you might buy stocks from companies that have already withstood economic downturns. Basically, in uncertain times, stick with what you know. Also, if you are going to buy in during bear markets, remember, money for short-term goals, which must be accomplished in less than five years, should not be invested in the stock market.
3. Trying to Buy at the Bottom
Trying to time the market is almost always a lost proposition. It's important to remember that you won't be investing at the bottom of a bear market. Buy stocks because you want to own the company for the long term, even if the stock price drops a bit after you purchase it. Rather than attempting to time 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 decrease, you'll be able to profit from the new lower pricing instead of sitting on the sidelines.
Bear Markets in History
Bear markets are a typical occurrence. In fact, there have been 33 since 1900, which averages out to one every 3.6 years. Here are three famous examples you may be familiar with:
2000 - 2002 Dot-Com Crisis: In the late 1990s, the increased usage of the internet resulted in a significant speculative bubble in technology companies. After the bubble burst, all-important indexes went into the bear market territory, but the NASDAQ was particularly heavily hit: It dropped by nearly 75% from its prior highs by late 2002.
2008 - 2009 Market Plunge: In 2008, a global financial crisis erupted due to a flood of mortgage lending and the associated packaging of these debts into investable securities. Many banks collapsed, necessitating massive bailouts to save the US financial system from imploding. The S&P 500 had dropped more than 50% from its prior highs by the time it hit its lows in March 2009.
2020 COVID-19 Crash: The COVID-19 epidemic, which swept across the globe and caused economic shutdowns in most major countries, including the United States, initiated the 2020 bear market. The stock markets plummet into a bear market in early 2020 was the fastest in history due to the speed with which economic anxiety spread.
Get A Consultation with an Experienced Financial Advisor
Whether the market is at an all-time high or low, you need a financial advisor who will stand by your side. Our first priority here at Fourth Avenue Financial is your overall financial success, through the best and worst of times. We want to help you develop, implement, and monitor a strategy designed to address your individual situation to ensure all your investments are setting you up for a path of financial success. If you are ready to start planning for your financial future, we are here to help. Contact us today at (304) 746 7977 to schedule a meeting with one of our experienced financial advisors or schedule online: https://bit.ly/3nbIQjr.
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