Bear markets, when assets plummet 20% from recent highs, are among the scariest market events you'll encounter. But don't stop investing.
The words "bear market" strike fear into the hearts of many investors. But these deep market downturns are unavoidable, and often relatively short, especially compared with the duration of bull markets, when the market is rising in value. Bear markets can even provide good investment opportunities.
Here's more on what a bear market means, and steps you can take to make sure your portfolio survives (and even thrives) until the bear transforms into a bull.
A bear market is defined by a prolonged drop in investment prices — generally, when prices fall by 20% or more from their most recent high. There can be bear markets for a market as a whole, such as in the Dow Jones Industrial Average or the S&P 500, as well as for individual stocks.
While 20% is the threshold, bear markets often plummet much deeper than that over a sustained period, not all at once. Though the market has a few occasional “relief rallies,” the general trend is downward. Eventually, investors begin to find stocks attractively priced and start buying, officially ending the bear market.
Bear markets are characterized by investors’ pessimism and low confidence. During a bear market, investors often seem to ignore any good news and continue selling quickly, pushing prices even lower.
While investors might be bearish on an individual stock, that sentiment may not affect the market as a whole. But when the market turns bearish, almost all stocks within it begin to decline, even if individually they’re reporting good news and growing earnings.
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