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What is a Bear Market?

A bear market occurs when the prices of securities fall by at least 20% from recent highs over a sustained period. The stage of the market can be described as bearish due to widespread pessimism and lack of positivity amongst investors. An Incorrigible Bear market: Exactly the opposite of a bull market, where prices surged up to at least 20% from recent lows.

Causes of a Bear Market

Bear markets are often stimulated by a range of factors that curb economic expansion, geopolitical issues or shifts in certain market sentiments. Investors sell off their investments in response to anticipation of lower corporate profits or economic activity, pushing stock prices down. It is a fall in confidence regarding the future performance of this market.

Frequency and Duration

Bear markets, on the other hand, occur every 6 years and typically last roughly 363 days, a far quicker turn of events than bull markets, which hang around almost five times as long at about 1,742. Although bear markets are shorter-lived, they can be more devastating, with an average loss of circa 33% compared to the gains achieved by bull markets, which stand at around 159% on a like-for-like basis.

Impact on the Economy

Bear markets are often but not always associated with declines in the market, or a recession. When a bear market bites, the whole economic activity might grind to standstill resulting in deflated consumer confidence and unemployment rates. Here in the latest research, we can make some strong assumptions regarding bear markets and recessions but not all bear markets lead to a recession nor does every recession have a preceding bear market.

Strategies for Investors During a Bear Market

To survive bear markets, investors can implement different strategies:

  1. Maintain Emergency Savings: It is important to have enough funds in saving account at times of urgent requirements which should provide 3 months and up to even 6 months expenses which are necessary. This buffer is all the more necessary in times of economic slowdown.
  2. Stick to Your Investment Plan: Rather than giving in to panic and unloading investments at a loss, investors should focus on their long-term views. After all, bear markets are reversible events - such depressing stretches of months or years have always come to an end and rational investorism has replaced faddist pessimism in the aftermath.
  3. Consider Dollar-Cost Averaging: One of the most popular approaches to investing in volatile times is dollar-cost averaging, where you invest a set amount every month or quarter regardless of market conditions. This enables the investor to buy more shares when prices are low and fewer shares at higher prices, essentially lowering her average cost per share over time.
  4. Look for Investment Opportunities: Bear markets will often provide you with great investment deals so long as the company still remains a high quality stock. If you have a long-term horizon as an investor, then currently low prices may provide buying opportunities with potential gains in the future.

Historical Examples

Several important bear markets have occurred throughout history. Take the great depression of the 1930s, which led to a big fall in stock prices. Even more recently, the 2008 financial crisis triggered a major bear market as it became apparent that banks had written too many bad mortgage loans on properties in housing bubble markets and were failing en masse. Markets always recover, and over time, this tends to create significant bull markets.

Conclusion

A bear market is a crucial concept that investors should know how to handle. Investors can reduce several risks in bear markets, and weather the storm by sticking to a reliable investment strategy, focusing on long term objectives and being prepared for times of economic weakness. Just keep in mind that bear markets can be intimidating, but they also play a natural role in the economic cycle and have always been followed by periods of recovery and expansion some time down the line.

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