What Is A Bear Market And How Do You Invest In One?

When investing in the stock market, you might hear it called a bear market and wonder what a bear has to do with investments. Generally, a bear market represents a downward trend. But savvy investors can still find plenty of opportunities to build a portfolio during a downturn.

Below, we explore how to invest in a bear market.

Bear Markets, Defined

A bear market is typically characterized by a market decline of 20% or more. It’s often associated with a recession or weak economy.

While a market drop might make you think of individual stocks, a downward slide can include other types of investments like bonds, index funds, ETFs and debt securities. During a bear market, investors tend to have a negative economic outlook for the future.

Historical Overview Of Bear Markets

When a bear market takes hold, the economy is often a picture of doom and gloom. Many investors assess the state of the market through the Dow, or the Dow Jones Industrial Average, which is a stock index that contains 30 well-known companies.

Infamous bear markets include the Great Depression and the 2008 financial crisis. But bear markets have come and gone in shorter stints throughout the U.S. stock market history.

Below is a look at some examples of bear markets throughout history and the performance of the S&P 500 during that period.

What Causes A Bear Market?

As regular investors know, the stock market is constantly fluctuating. It’s not unusual for the market to swing up and down based on what investors are doing on a given day (or even hour). If there is a small amount of uncertainty about the economy, stocks tend to dip. The uncertainty could be due to political issues, consumer activity shifts, inflation rates, interest rate trends and more.

Notably, the market can also be impacted by how investors feel about the situation. When investors panic, that can push stock prices down fast. In some ways, this is a self-fulfilling prophecy because investors thinking about a bearish market can cause a bear market to materialize.

How To Invest In A Bear Market

Investing is a key part of building a solid financial future. But during a bear market, it’s natural to consider your strategic options.

1. Create A Plan

Before putting money into the market, it’s important to map out your financial plans. For investors with a long-term outlook, a downturned market might not be cause for alarm because you aren’t worried about the short-term value.

Of course, past performance isn’t a guarantee of future success. But historically, the stock market has been a reliable investment strategy, as long as you have a long-term horizon.

Investors with short-term investments instead of long-term investments might choose to keep their money out of stocks during a bear market. After all, the stock market is known for its volatility. If you have short-term plans for the money, the financial markets likely aren’t the best place to save it. A high-yield savings account might be a better fit.

2. Try Dollar-Cost Averaging

Dollar-cost averaging is an investment strategy to consider in a bear market. It involves committing to invest a fixed amount in the stock market on a regular basis. This is a powerful way to build your portfolio while the market rises and falls.

For example, you might decide to invest $100 on each payday. If you stick with this plan, the rising and falling prices will be averaged out across your portfolio purchases. With that, you won’t have to worry about buying too high.

3. Keep A Diversified Portfolio

Maintaining a diversified portfolio that consists of multiple types of investments can insulate your overall portfolio against losses. That’s because different investments go up and down over time, which can lead to a more balanced growth overall.

4. Work With A Professional

If high volatility in the stock market makes you nervous or uncomfortable, you might consider working with a professional. A certified financial professional may be able to help you plan a secure financial future that fits within your risk tolerance.

FAQs: Bear Market

You have questions about what a bear market is. We have answers.

Are we in a bear market?

As of writing in mid-2024, we aren’t in a bear market. The latest bear market started in January 2022 and ended about 10 months later.

How long do bear markets typically last?

The length of a bear market varies based on the situation, but they typically last an average of 14 months.

How do experts know we’re entering a bear market?

Experts watch key indexes, like the S&P 500 and Dow Jones Industrial Average, to determine if we are entering a bear market. When the market drops by at least 20%, that’s the official start of a bear market.

What’s the difference between a bear versus a bull market?

The main difference between a bear versus bull market is where the market is trending. In a bear market, prices drop, and investors are uncertain. Bull markets are fueled by rising prices and investor optimism.

What are the risks of selling during a bear market?

If you sell your stocks during a bear market, you are locking in those losses. For investors who can hold their stocks through the bear market, it’s likely they can sell the securities for more after the bear market has ended. In general, it’s best to have a long-term outlook for investing in the stock market. Otherwise, you could easily lose money if you need to sell during a bear market.

Is it good to buy in a bear market?

If you are building a long-term portfolio, then it’s usually a good idea to continue investing during a bear market. While it’s unlikely you’ll buy at the very bottom, it is likely that you’ll buy at a price that will probably rise over time. Remember, investing consistently over the long term is a reliable strategy for building wealth.

What not to do in a bear market

During a bear market, you might be tempted to sell off your stocks to avoid larger losses. But if possible, don’t give into the urge to sell everything. If you sell, you’ll lock in those losses without giving the market a chance to rebound and recoup your value. Consult with a financial advisor if you have specific concerns about navigating a bear market.

The Bottom Line

A bear market can be cause for concern. But if you are building a long-term investment portfolio, you should expect to encounter bear markets along the way. Instead of selling off your investments, stay the course to continue building wealth in spite of a bear market.

If you aren’t sure how much you can afford to invest, download the Rocket Money℠ app today to map out a budget that works for your current needs and future financial goals.