What Is a Bear Market and How You Should Invest in One?

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The stock market is characterized by two animals: a bear and a bull. A bear market occurs when stocks on broad major indexes like the S&P 500 or the Dow Jones Industrial Average lose at least 20% of their value for a sustained period of time. 

They are a normal, natural and inevitable part of stock investing, and while bear markets vary in duration and severity, they never last forever and the market always recovers. 

What Causes a Bear Market?

Bear markets happen when investors feel pessimistic about the market. This can cause widespread selloffs, which can lower the cost of stock. 

Bear markets tend to happen with a general economic decline, which is typically characterized by a constricting GDP, rising unemployment and shrinking corporate profits. 

It’s important to note that those generalities don’t always apply — think back to the state of the market in 2022. Stocks were in a deep bear market for months, yet the job market remained strong and the GDP showed continued economic production.

What Are the Characteristics of a Bear Market?

Generally, bear markets occur over a matter of months, in a slow, grueling decline. However, external events can make the decline happen rapidly. The bear market that coincided with the initial COVID-19 outbreak in early 2020, for example, was the fastest on record, dropping over 20% in just 19 days.

Bear markets often coincide with recessions, but not always. Nine of the 12 bear markets since 1948 have been followed by recessions, according to Reuters.

Bear Markets vs. Corrections

Not all significant downturns signal the onset of a bear market. When major stock indexes drop by more than 10% but less than 20%, it’s called a correction.

Corrections are normal occurrences and should be expected to happen about once every two years. According to data from Yardeni Research, there have been 28 S&P 500 corrections since 1950, and they have occurred every 1.9 years on average. By contrast, bear markets occur about every 3.5 years. 

How Long Does a Bear Market Last? 

Yardeni Research estimates that the average bear market lasts about 10 months. While the average correction has lasted 189 days. 

However, long-term averages can be misleading, and bear markets have been trending shorter and shorter. Before 2022, the previous three bear markets, in 2011, 2018 and 2020, averaged just four to five months.The 2022 bear market lasted 282 days.

How To Invest in a Bear Market

Watching at least one dollar in five evaporate from the value of your portfolio is an unsettling prospect, but emotion-based investing produces bad results. 

When a bear market batters your holdings, it’s important not to panic and resist the urge to sell.

Bear markets are a normal part of investing in a stock market that is cyclical by nature. The natural inclination to sell your holdings to stem your losses locks those losses in forever. 

Every bear market in history has been followed by a recovery and, eventually, a bull market — and you want to make sure your money is in play when that happens. Remember, no matter what the numbers on your computer screen say, you never lose anything until you sell. 

Don’t Try to Time the Market

Virtually all credible experts advise against trying to time the market’s cycles, and instead, to build a portfolio that’s designed to weather the market’s ups and downs over the long term.

Keep a Diverse Portfolio 

Diversify your holdings, which you can do with the purchase of a single ETF or index fund. Some stocks fare much worse than others during market downturns, and diversified holdings provide a hedge against risk. 

For example, the travel industry might not experience a downturn at the same time as the tech industry.

Use Dollar Cost Averaging

That’s when you contribute a fixed amount of money to your portfolio on a regular schedule. Over time — including through bull and bear markets — you’ll buy more when stocks are cheap 

Bear Markets vs. Bull Markets

Bull markets are the investing opposite of bear markets. They typically occur at the top of the business cycle when profits rise, businesses expand, unemployment falls and the economy grows. That kind of climate spurs investor optimism and triggers a buying spree in anticipation of market gains. 

A bull market becomes official when stocks on major indexes experience gains of at least 20% for a sustained period of time.

One of the most important differences is that bull markets typically last much longer than bear markets, which is why stocks continue to produce sustainable gains over the decades. 

The Bottom Line

The stock market has gone up and down throughout its existence, but most importantly, it always goes back up. It’s important to keep your financial goals in mind during a bear market.

Karen Doyle and John Csiszar contributed to the reporting for this article.

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