A bear market is a broad market loss of greater than 20%. Declines between 10 and 20% are called corrections. Bear markets can persist for weeks, months or even years.
The Dotcom bust, for instance, sparked a bear market that lasted nearly three years. The S&P 500, which is the most widely-followed equity index in the world, experienced 22 bear markets between 1928 and October 2022 and 55 corrections in that same time period.
While bear markets occur less frequently than corrections and are slightly easier to forecast, by the time investors see these coming, it’s usually too late to sell, since investments will already be down considerably.
When fears of a bear market or recession take over, they tend to trigger actions that are detrimental to portfolios, so it’s crucial for investors to stick to long-term investment plans when bear markets take hold.
The markets invariably move through cycles, which is why diversification is so important. No one should put all of their retirement nest egg in one basket.
But why is a 20% drop called a bear market?
There’s two theories on the name. One suggests it came from the way a bear attacks its prey, by swiping downward with its paws, which created the association between bears and falling stock prices.
The other says the term originated with pioneer bearskin traders, who would sell pelts they’d not yet received (or paid for), hoping to buy the fur from trappers at a lower price than what they’d sold for, making the word “bear” synonymous with a declining market.
Whatever the reason these declines are named after bears, it’s important to remember, when a bear market hits, that the only way to lose money in the market is by selling at a lower price than what was paid for the investment.
Until you sell, those are merely paper losses.
And while nobody can know when a bear market will end, markets will always recover.
