What’s a Bear Market? Do We Invest?

In March, the stock market suffered (to date) several of its largest one-day point losses ever. In just a couple weeks, some stocks lost half their value – or more. Ouch.

A few days ago, we discussed the Dow, the market index that tracks 30 of America’s finest companies. Remember the Dow dropped from its high of nearly 30,000 to just under 20,000, and even these blue-chip stocks lost value? Just like that, we’re worried about a bear market. But last week, the Dow posted good gains three days in a row – maybe it’s not bear market territory after all??

So, which is it – bear market or no bear market? Actually, stock market volatility, or erratic price ups/downs, seems to be the norm now. The choppiness is getting more pronounced. Even if you don’t watch the stock market seesaw, you’re still probably following news that causes you to worry about family finances and be stressed that the economy might not recover. Yet some investors are buying stocks (or seriously considering it) since some good stocks are “on sale.” Really? Don’t bear markets suck money out of investments? What are people thinking?!

What Is a Bear Market?

But what exactly is a bear market, and how was it so quickly determined that we’re being catapulted into one? By the classic definition, a true bear market occurs when we see stock price declines of 20% or more that stretch over several months or even years. Down markets originally got this nickname because a bear knocks down its victims and will attack with a downward stroke of its claws. Bear markets can happen when an economy stalls or remains sluggish too long, or with recession, investor fear, pessimism, or catastrophic events.

To date, we have not met all the conditions to really call the start of a bear market (20%+ declines haven’t lasted long enough), but investors are skittish and the Covid-19 pandemic would be considered a catastrophic event. So, some financial pundits have jumped to that conclusion anyway. We can call them “bearish”, but we should wait awhile before labeling March 2020 a bear market in the traditional sense. This could end up as a market “correction,” which is a downturn of 10% or more that typically lasts less than two months but can go longer.

Hindsight might show us that March 2020 was either a correction or the start of a true bear market. It’s so difficult to predict the start of a bear market because fear, drama, opinions and panic selling take center stage. In addition, that 20% slide signaling a bear market and the 10% dip for a correction are arbitrary numbers, set years ago. In the past, they have been fairly decent predictors, but as the Dow grows and the up/down swings get larger and more frequent, maybe those percentages need some adjustment to reflect today’s market situations.

Bear Markets vs. Bull Markets

Bull market territory is just the opposite of a bear market. In a bull market, stock prices are charging up, just like an excited bull thrusts up his horns in attack. Investors and financial analysts are confident, optimistic about the economy’s strength and company profits.

Our most recent bull market began March 2009, and is the longest bull market on record (to date). In that time, however, we did have a few corrections, or declines of 10% or more.

But again, no one can predict when simple corrections, bull markets or bear markets will begin or stop. That is only determined when it’s over and the real numbers can be analyzed. Yet it does give the pundits and media some drama and news fodder. (Note that “bull market” is associated with the stock market in general, but it can also refer to a small group of stocks or asset classes – you can have a bull market in the precious metal sector, for example.)

It’s Not the Time to Be a Drama Queen

Does it really matter to you if a bear market has begun? If you’re reeling over the sticker shock of your 401K balance, relax and think about your overall financial plan. This is the time to keep calm, not freak out. And, keep these 5 caveats in mind:

  1. This is a loss on paper only – Yes you lose the money if you sell, but only if you sell . History shows that staying your course is usually the best investor strategy. You might miss out on the rebound if you’re not in the market.
  2. What goes down, does come up – The market has gone up in value over the long run. History shows market declines are often steeper and over a shorter time, while recovery upswings take longer and rise more. If you buy good companies, there are good odds they will rise and reward you over the long haul. You are in this for the long-term, right?
  3. Think in terms of decades, not weeks or months – Time in the market matters more than market timing. The longer you stay invested, the less your risk of losing. Staying invested in the market for 15 or 20 years decreases your chances of losing money more than if you’re in for five years or less. Allow your investments time to produce for you.
  4. Quality investments can let you sleep at night – If you take your risk personality into account in making good investing choices and you don’t invest money you need to live, then market corrections can be easier to stomach. Those who decide to buy high-quality companies during stock market corrections (the risk tolerant), have a high probability of seeing their investments go up. That said, the stock market is not the place for your emergency fund or money you will use within five years.
  5. Stock price ups & downs are inevitable – Bear markets and recessions are part of the natural investing cycle. As always, the greater rewards of a profit come with the greater risk of a loss. Investing, by its nature, means your initial investment is at risk in order to earn a payoff. If this investing risk isn’t what you had in mind and you fear the impending bear markets too much, then stick with a savings account where you don’t risk principal.

Is Now the Time to Invest?

If this is the first market correction you’ve really noticed, it might be comforting to realize the U.S. has actually recovered from 33 bear markets and more than 100 corrections from 1900 to 2018. That’s a bear market or correction experience roughly every couple years or so. Some have been short, and in others, the Dow tumbled over 50%. The average bear market lasts about 15 months. This is basically the first major correction since the stock meltdown in 2008, aside from a short but sudden year-end drop in 2018.

Do you invest now or wait? That is the million-dollar question, isn’t it? No one knows when the market will go up. That’s why there are investors that buy and those that sell every day the markets are open. We all have different opinions. If you want to invest, the important thing is to get started.

How to Start Investing

Yes, the hardest thing is starting…and many just never get around to taking that plunge.  If you haven’t started but want to invest, here’s a way to dip your toe in:

  1. First, make an investment plan – even if you only have a small amount, like $500 or $1000 to invest.
  2. Decide what you wish to buy, over what time period to do it, and how much you will put in the market each time.
  3. Then, be disciplined in following your plan. By sticking to your investment plan, you take the emotions out of your purchases.

For example, maybe you decide to invest $1000 over four weeks, or $250 a time. When you buy one investment, putting your investment dollars in at different time periods, this is called dollar-cost averaging. It’s a good way to wade into a choppy market.

Will the market’s wild gyrations in March 2020 cause you stress, present a buying opportunity, or not really change your investing pattern? When and how you invest is your decision – which depends greatly on your risk personality and how much money you afford to risk.

Let me know what you decide!

 

5 Responses to “What’s a Bear Market? Do We Invest?”

  1. Pro Investivity

    I thought I knew about what a bear and bull market was until I read this article! Thank you for enlightening me about these what might be called as “basic investment terms”, that I apparently didn’t know.
    I also loved how well you are able to express your opinions- so clear and effective.
    I wouldn’t wanna miss your future articles so I have decided to follow your blog. 🙂

    Like

    Reply

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