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July 29, 2021

What Is A Bear Market And How Does It Affect You?

Bear markets are normal but unpredictable. They happen during a time when stock prices are dropping by 20% or more from recent highs. Since 1928, investors have experienced 26 bear markets in the S&P 500 index. While a bear market is normally referred to as the performance of the S&P 500 which represents the whole stock market, it can also be associated with any other stock index or individual securities reducing by 20% or more. In addition, it's usually accompanied by economic recession and risk-averse investors.

How Do They Occur?

Generally, the signs of a bear market begin when investors start displaying some fear and precaution towards the market. Markets typically undergo fluctuations due to changes in supply and demand forces. For instance, in March 2020, the Dow Jones Industrial Average (DJIA), the S&P 500, and the Nasdaq fell into the bear market in two days. This happened at the onset of the Covid-19 pandemic which caused significant economic downturns. This gave rise to worry over the economy's stability leading to job losses and decreased consumption.

Typically, bear markets can last on average up to 9.6 months but can also be just several weeks as soon as the global economy starts picking up. Even so, bear markets can happen in a strong economy.

Markets tend to put investors on high alert because they have to safeguard their investments. Given that there are many factors to consider, such as the political climate, exchange rates, interest rates, and inflation, it is easy to get alarmed leading to drops in stock markets. At times, when everyone wants to buy a particular stock, its price shoots up. Overall, no specific factor takes credit for markets falling or rising but investors' feelings and attitudes tend to play a major role in how markets fair.

Surviving a Bear Market

A bear market should be treated as a normal part of life. So, investors have a chance to survive it and protect their investments. It is easy to enter into panic mode when stock prices drop to 20% and more. Usually, an investor can decide to offload their shares to salvage some losses.

It is understandable to react this way as stock market crashes such as the 1929 stock crash can be devastating. But this opens an opportunity for those who want to invest in the stock market. They can afford to buy more shares as the prices have significantly dropped. When the economy starts recovering, they become the winners as stock value also rises. So, instead of fighting against an eventual event such as a bear market, a wise investor can find a way to work around it.

One way is diversifying investments which a seasoned investor always applies: When bear markets occur some stocks will be worse off than others. So, it pays to spread investments in several sectors or options such as bonds or property when the market falls. There is no perfect portfolio, but if you look into past events, it is possible to tell which assets or sectors will likely beat the market. For instance, defensive stocks often perform well because their demand is constant even in uncertain markets. Doing some research on financial markets will guide you in allocating appropriately.

Investors should avoid emotional investing at all costs: Investing in the stock market is not a get-rich-quick scheme, however; some investors are of this view and get emotional. When stocks plummet they round up their shares and sell them at very low prices. When a bull market enters, they are left losing out. It is normal to feel a mixture of emotions. However, investing should be a sober undertaking regardless of the state of the market.

A conscious investor should be in it for the long run and not be easily influenced when another bear market starts: Even if bear markets are anticipated they never last. Long-term investors will invest in companies they want and see as good prospects. They are ready to take high risks for high rewards but with some caution.

Adopting simplicity in investing prevents rash decisions: This means slowly building up a portfolio over time instead of just buying shares because they look promising. Working with an advisor can help create a good strategy to effectively manage investments.

Bottom Line

The latest bear market which happened in 2020 only lasted 33 days. According to US News, in 2020 industries such as online retail and technology were gainers while airlines and physical stores lost. For any investor, this should spur them to work on a solid investment strategy that provides leverage over the effects of bear markets.

If you are interested in understanding more about bear markets and how they will impact your business or investments, PS Group is here to help. We are a strong network of investment partners who aim at centrally optimizing our resources, and capital to generate overall success. Please contact us so that we can help you reach your financial potential.

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