A bear market is a poor economic time period. Bear markets have happened all throughout history and that won’t change. It is smart to be educated so you know what to do if and when the market shifts.

What is a bear market?

Unlike a bull market, a bear market causes investors to scatter. It isn’t the positive side of the market. It highlights the downturn. 

A bear market is a time period in the market when asset prices significantly decline. To be considered a bear market, the decline must be about 20% or more. This typically causes wise investors to cautiously change their strategies.

When investors change their strategies, a common strategy chosen is short selling and managing stocks with an emphasis on risk management. Very different from the frenzy of buying during a bull market. 

The origin of the name comes from a bear’s nature to swipe its paw down during an attack, much like the market’s downturn can feel like an attack against investors. Imagine a giant polar bear running around wall street striking down all the stocks. It is a bit more symbolic than that, however.

Bears like Lemonade?

Let’s dissect how a bear market can cause disarray by exploring an example using Barney’s lemonade stand. 

Barney started a lemonade stand in Monahans, Texas due to the the lack of competition and the high temperatures in the area. A bull market occurred while the weather was reaching temperatures over 105 degrees Fahrenheit. However, now the temperatures have dropped to the 60s.

When the temperature dropped to consistent 60-degree weather, the demand for lemonade was no longer there. The amount of customers decreased. These are Barney’s observations:

This analogy highlights the difference in mindset in investors throughout the market when asset prices decrease by more than 20%. Just imagine that polar bear swiping down hopes and dreams while causing stress to investors. 

Real-Life Examples 

Bear markets typically don’t last as long as bull markets, though it does happen. The most significant bear markets in recent US economic history have lasted several months to over a year.  Below are two examples of the most significant and recognized bear markets in recent years and the prevalent factors during those times.

The above examples demonstrate drastically different contexts but still harrowing results. To some extent the 2007-2008 collapse was predictable, whereas the 2020 collapse came out of nowhere. 

There is never a clear answer to what could cause a bear market. There are some good investor mindsets to adopt that can help you be prepared.

Practical Application and Action 

The fear that often infiltrates investors minds during a bear market is natural. There are several steps that should be taken to wisely assess any future actions. The dip of more than 20% shouldn’t stop your trading, but should shift your mentality. 

Here are a few ideas to bear in mind;

  1. Portfolio Diversification 
  2. Investing in Low-Risk stocks 
  3. Not Selling Out Because of Fear

Although it may seem obvious, not doing anything is worse than trying out different strategies. Fear can grip you in those tight financial moments. If you use Equities Lab’s software, you can backtest for low-risk stocks that will make the bear market bearable for when that time comes around.