What Is A Bear Market And How Should You Invest During One?

Crashing stocks. Low returns. Bear market. You may have seen these terms being thrown around in the news recently. But what do all of these mean? What is a bear market and what can you do to protect your money during one?

bear market

Introduction To A Bear Market – The What, Why, And How Long

What Is A Bear Market?

A bear market is, very simply put, a prolonged decrease in prices in financial markets. The technical benchmark for a bear market is a 20 per cent decrease in stock or index prices and it is generally accompanied with investor pessimism, a large-scale sell off in assets and securities as well as a softening economy.

Quick note: An index is a collection of stocks. For example, the Straits Times Index (STI) is a name we give to largest 30 companies that are publicly-listed on the Singapore exchange.

So the value of one or a couple of companies’ stock is falling. Why is this happening and what does this mean?

Why Do Bear Markets Occur?

This is not a straightforward question to answer, mainly because a bear market can happen for many reasons.

The last time the S&P500, and index of the 500 largest publicly traded companies in the US, was in a bear market was in 2022. This bear market was in large part due to the lingering effects of the pandemic on financial markets, further exacerbated by the Russia-Ukraine crisis.

Previous significant bear markets include the 2020 bear market, triggered by the pandemic and the 2008 bear market, triggered by the housing bubble in the US.

How Long Do Bear Markets Last?

The duration of bear markets can vary in length depending on global situations such as the pandemic or geopolitical tensions and the various government policies being put into place. No two bear markets are the same, so it can be difficult to estimate exactly how long this one would last.

Generally speaking, bear markets can last anywhere between weeks to years. The average duration of a bear market is about 289 days (approximately nine and a half months). But every bear market is unique, and the duration of this particular bear market can be longer or shorter depending on its distinct economic conditions and reactions.

bear market
Source: Unsplash

Consequences And Implications Of A Bear Market

After hearing all that, you might think that a bear market spells doom and gloom with no clear end in sight. To some extent, that is true. Bear markets generally do indicate tough times.

On a macroeconomic scale, bear markets can mean slowing down of business growth. This could translate into decline in public investment, and dips in gross domestic product. To say that a bear market will lead to a recession can be a stretch because there are so many factors at play, but the possibility is always there.

Related: Will You Stop Purchasing Insurance In The Midst Of A Recession?

plunging stock on phone screen
Source: Unsplash

On an individual level, the most direct hit would probably be that downward sloping line indicating your stock portfolio performance. This can be quite steep in some cases and may cause you some alarm.

Essentially, a bear market means that some businesses are struggling to get by and investor confidence is wavering.

But bear markets are not the end of the road. We have seen many bear markets in the last couple of years in all types of economies all over the world yet most indexes have seen a great recovery post-bear market.

Bear markets can be troubling, but good news is that they do not last forever.

Related: Safe-Haven Investments— What Are They and How Can You Invest in Them?

Tips To Survive A Bear Market

1. Consider Value Over Price

During a bear market, the stock prices can get a little volatile. At this juncture, it is more important to determine the fundamental value of the company or commodity, rather than simply looking at its price.

A retail investor trading options online
Source: Unsplash

A bear market exposes which companies are simply riding the wave of good economic outlook and which have the financial prowess to last the test of time. So take this as a sign to consider which goods and services can survive the long haul. Think about which businesses have the positive leadership and operational quality to overcome this economic turbulence, and perhaps more to come.

Some questions to ask yourself before investing in a bear market would be the following. Is this good or service essential in any way? Is this a good business with steady operations and a solid track record? Will this company and its products still be relevant in decades to come?

To some, these questions point to broad based ETFs (exchange traded-funds) or index funds. For others the solution might be blue-chip stocks, commodities like precious metals, or even real estate. Regardless of what it is, if you find yourself saying yes to the questions posed above, then this stock/commodity/index may be worth investing in, even in the face of a bear market.

Related: How to Invest in Property in Singapore Without Buying One

2. Trade Consistently

Dollar-cost averaging is an investing technique first coined by Benjamin Graham in his book The Intelligent Investor. The idea itself is super simple: continually invest a sum of money in regular intervals (this can be a day, a month, or a year), with the intention of holding your shares for a really long time.

What this essentially does is average out the peak highs and lows of the stock market prices. A stock or index fluctuates normally, but can be even more volatile during a bear market. You can end up seeing sudden dips and quick rises that are rather hard to predict. So instead, by investing recurrently, you will purchase stocks at all kinds of prices. This will take the burden off you to time the market and instead allow you to buy into the general upward trend of a stock or index.

3. Learn How To Study The Market

Instead of diving head first into investing because the prices are so low, or copy trading to emulate the success of big hedge funds (which by the way, is not always the best idea), take this time to learn more about investing.

writing in notebook
Source: Unsplash

Channel the energy and stress of staring at the negative numbers into a productive activity by discovering more about how investors use charts to navigate the market. Pick up the tools of the trade by reading books or listening to podcasts on investing and financial literacy. Keep up with the market and hone your skills by tuning into trusted news sources.

Panicking and selling all your securities off can be tempting in face of economic downturn but instead challenge yourself to think of the bear market as simply a chance to learn more, make more calculated trades, and be more careful with your money.

Learn More About Investing and Compare Online Brokerages in SingaporeFind Out More

4. Diversify Your Portfolio

At this point, you may have heard this phrase over and over but that is because it is incredibly effective in reducing risk and minimising losses. Especially in the context of a bear market, you want to cushion falls in overall portfolio performance as much as possible. By diversifying your portfolio, you do exactly that. Even if one stock isn’t doing as well as you would have hoped, there are others that could be performing much better.

Investing in competing companies in the same industry, investing in different industries, having multiple types of investments (i.e. stocks, bonds, fixed deposits etc.) can all help your portfolio become more diversified and hence less volatile.

Related: How to Invest in REITs Effectively For Portfolio Diversification

5. Keep Commissions As Low As Possible

Lowering the commission you need to pay is important to maximise your returns, especially in a bear market where things are more uncertain than ever.

Commission fees can actually take up a decent chunk of your costs, especially when you plan to invest for the long-run. If you are trading in the thousands and more, do not be surprised if your commissions cost you up to hundreds of dollars.

This is why choosing a brokerage with the best and lowest commission rates is essential to survive a bear market.

If you are interested in investing in US stocks, online brokerages like moomoo with zero commission fees would be your best friend. If you are interested in all international markets, an online brokerage like Saxo with wide access and competitive fees would be a great option

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Now that you know more about bear markets, you would have come to realise that they are a common occurrence. While they can seem devastating in the short run, more often than not the economy bounces back, and everything returns to normal soon enough. To counter the short-term effects of a bear market, adopting a long-term mindset by consistently trading, diversifying your portfolio, and using brokerages with low commissions is the way to go.

Compare The Best Online Brokerages in SingaporeFind Out More

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