A bear market is a market in which selling predominates, resulting in a marked decline in asset prices.
Stock markets go up and down every day. Historically, prices have trended higher with occasional dips along the way. However, a substantial and prolonged decline in the stock market is a not-infrequent occurrence.
When a stock market decline is steep and sustained, investors refer to the event as a bear market. While there is no official statistical marker to define a bear market, it’s broadly agreed that a 20% drop in stock prices across several market indexes qualifies.
Bear markets can be self-fulfilling. As selling picks up an increasing number of investors seek to avoid losses and also sell, feeding a vicious cycle.
A decline of 10% that results in a reversal and rising prices is considered a correction, not a bear market.
It’s impossible to predict a bear market before it happens and even harder to estimate how long it will last. Nevertheless, the average bear market has lasted 15 months.
Bull markets, the opposite of bear markets, last longer by far. Sometimes they run for years on end. All a bull market needs to continue higher is the broad agreement among investors that the economy is growing and no disaster is imminent.
Many market observers look at events in the political and economic realm for the reason a given bear market started. Yet assigning blame to a single event is difficult.
Markets have risen and fallen in value during periods of war, inflation and civil unrest. They also have fallen sharply during otherwise unremarkable and relative good times.
All you really need to set off a bear market is high stock prices. If enough investors conclude that prices are above a sustainable level, that can lead to protective rounds of selling to lock in profits.
Investor psychology being what it is, those early rounds of selling can feed back on themselves, triggering more selling.
If a negative headline happens to appear during this process, the selling could speed up, pushing stock values far below the 20% marker.
Regardless of how they start, it’s also the case that bear markets end. At some point the rational, cool, long-term investor reappears and takes the fall in stock prices for what it is — a chance to invest while prices are low.
The key to success in long-term investing is to recognize the unpredictability that is inherent to any crowd-driven process.
Owning a risk-adjusted portfolio and rebalancing allows the serious investor to enjoy the benefits of the longer bull runs while minimizing the damage when the bear attacks.
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