“I dunno. I’m feeling kinda bearish.”
If you hear one of your investor friends say this out of context, it might sound like they’re feeling hungry. Or hairy. Or ready to help Leonardo DiCaprio win an Oscar in The Revenant.
But in the world of investing, “feeling bearish” means something else entirely.
Bull vs. bear market isn’t quite as simple as good vs. bad market. It’s a bit more nuanced than that, and once you learn the key differences, you can start to invest much more effectively.
What Is a Bear Market?
If you’ve read anything about bear markets, or simply seen headlines, you’ve probably surmised that it’s not such a good thing. Almost like running into a bear in the woods.
Indeed, a bear market is when prices are trending downwards.
The specific definition is when the S&P 500 stock market index drops 20% from recent highs. Looking at the index prices over the past five years, I bet you can spot when we entered bear territory:
The reason investors use the S&P 500 to define bear markets is because the S&P 500’s performance is widely considered reflective of the greater markets as a whole.
Now, if a bear market is an objective metric — not a feeling — why did your friend say they were feeling “bearish”?
In the investor world, “bearish” is synonymous with pessimistic. So if your friend says they’re feeling bearish on Tesla stock, for example, it means they think prices will start (or keep) trending downwards.
Why Is It Called a “Bear” Market?
Nobody knows for sure.
Some say the term originated centuries ago, when middlemen who sold bearskins would presell them to customers in the hopes that prices would tumble by the time the trappers actually arrived with the product. They could presell at £10 in January, buy for £3 in May, and pocket the difference for a nice product.
That’s one theory as to how the term “bearish” came to mean the expectation that prices will fall.
But others say the terms “bear” and “bull” came from the simple fact that bears attack downwards and bulls attack upwards.
Are We in a Bear Market?
The S&P 500 began sliding in January 2022 and the bear market was mathematically confirmed on June 13. In June 2023 it was declared ‘finally over.’
How Common Are Bear Markets?
Bear markets are pretty common. On average, they occur every 56 months (four years, eight months).
What Is a Bear Market in Real Estate?
While the term “bear” typically applies to the stock market, it can apply to other markets as well.
For example, a bear market in real estate is when housing prices drop 20%. And unlike bear markets for stocks — which happen every four years or so — there’s only been one bear market in real estate in the past 20 years.
Bet you can guess when:
What Causes a Bear Market?
Tons of factors typically play a role in the markets trending downwards. In 2022, those include (but certainly aren’t limited to):
- Residual economic side effects from the pandemic
- Rising interest rates
- Fears of another recession
- Crypto Winter
- Unexpectedly high inflation
- The war in Ukraine
All of these factors make people feel nervous that the markets will go down. They create bearish sentiment, less investing, falling prices, and even more bearish sentiment.
How Long Does a Bear Market Last?
Historically, the average bear market has lasted nine months.
How to Invest During a Bear Market
Bear markets can be an exciting investing opportunity, but just like actual bears, they should be approached with caution and careful planning.
Many investors just leave bear markets (and bears) alone. They take a “have a pint and wait for this all to blow over” approach and neither buy nor sell.
That’s because they know the markets will recover eventually. A century of historical data shows us that the S&P 500 will always heal and reach new highs. So holding out is a 100% viable strategy, and you shouldn’t feel FOMO for letting your investments just sit.
The worst thing you can do during a bear market is sell. Unless you absolutely need that money, leave your investments alone. Because even though your shares may have gone from $100 to $50, they may go back up to $125 within a few months.
Remember, seeing red in your portfolio doesn’t mean you’ve lost money. You’re only losing money if you sell at the wrong time.
On the flip side, making small, calculated buys during a bear market can actually be a smart move. So let’s discuss strategy!
Is a Bear Market Really a “Sale” on Stocks?
You’ve probably heard a bear market called “a sale on the stock market.” There’s truth to that idea, but it doesn’t mean you should go on a shopping spree just yet.
The truth to that idea stems from the fact that again, the stock market always bounces back. So if a blue chip (aka reliable) stock like Microsoft was at $330 and fell to $250, then may be a good time to buy before it possibly bounces back to $330 and beyond.
Even still, here’s why many investors don’t shop during bear markets:
- We don’t know when the markets will bounce back. Microsoft could just as easily keep falling to $200 and stay there for months or years.
- … and if you need to sell in the meantime, you’re SOL. You probably shouldn’t tie up money you might need in the near future in an unpredictable bear market.
If you want to invest safely during a bear market, consider this strategy:
1. Calculate Your Risk Tolerance
Your risk tolerance will dictate how much you can (and should) invest during a bear market. You can find your risk tolerance by taking my 10-question multiple-choice quiz here.
One major factor of risk tolerance will be your horizon, or how long you can afford to have your money tied up. If you’re looking to buy a house in 18 months, for example, you may not want to risk investing in a bear market.
2. Hedge Your Risk with Dollar Cost Averaging
Dollar cost averaging is a fancy term for investing a little at a time. So instead of buying $1,200 worth of Microsoft today, you buy $100 with each monthly paycheck over the span of a year.
DCA lets you buy at an average price over the span of a year, which helps to hedge your risk of buying too high.
3. Consider Index Funds and I Savings Bonds
Index funds let you effectively invest in the whole stock market in a single click, which is why they’re the secret to easy wealth-building. You can buy them just like regular stocks on Robinhood or TD Ameritrade.
Treasury I Savings Bonds, or I bonds, offer an APY that matches the rate of inflation. So if inflation is super high during a bear market, they’re a smart buy.
Case in point, if you invested up to $10,000 in I Bonds before November 2022, you’re guaranteed to get six months of 9.62% interest.
4. Stick with Good Investing Principles
It’s best not to enter a bear market (or any market) with a goal of short-term riches.
That’s because timing a bear market is almost impossible. And just because the market heals doesn’t mean it’s going to bring every single stock with it.
Good investing doesn’t change during a bear market — it just presents an opportunity to buy a little more on sale. So instead of trying to find the next meme stock that’ll go to the moon, it’s better to watch r/wallstreetbets from a distance and stick to the same time-tested principles of good investing:
- Know your risk tolerance
- Keep it 90% “boring” (bonds, ETFs, index funds) and 10% “exciting” (stocks, crypto)
Before wrapping up, let’s cover bull markets, too. Because one day soon, we’ll be in one!
What Is a Bull Market?
A bull market is the opposite of a bear market. In money terms, it’s when the S&P 500 rises 20% from recent lows.
Colloquially the terms “bull market” or “bullish” can apply to any market, index, or individual security. You can feel bullish (or bearish) on a certain stock, the real estate market, etc.
Why Is It Called a “Bull” Market?
Some say the term emerged from the nineteenth century London Stock exchange, a full century after “bear market.” Back then, when traders felt confident in a certain stock they’d pin it to the bulletin board — hence “bullish.”
Still, others say it’s just because bulls attack up and bears attack down.
How Long Does a Bull Market Last?
Thankfully, bull markets tend to last much longer than bear markets: 3.8 years on average, according to Kiplinger.
Most recently we had the longest bull market in history, from 2009 through 2020. It probably would have gone on longer, too, if not for that pesky pandemic!
How to Invest in a Bull Market
Generally speaking, there are two ways that intrepid investors try to seize a bull market:
- They buy early, before prices become overinflated.
- They sell high, before prices peak.
But timing a bull market can be tricky. And while the markets always recover overall, some individual stocks may never return to their bullish peaks (see Macy’s or Norwegian Cruise Lines).
In the end, it’s OK to skip the FOMO and let bull and bear markets come and go. There’s no need to rush out and buy certain stocks before it’s “too late.” You have plenty of time to let your fortune grow, and a steady diet of index funds and the occasional blue chip will keep your portfolio healthy, regardless of market conditions!