12 Things You Should Know About Bear Markets


If you have ever had a conversation with me about the stock market, you know how I feel.  It’s completely unpredictable.  Even my own husband wants me to tell him when the next market downturn will take place and he gets disappointed when I say that I have no idea.  A lot of people predicted it was going to happen last November, but it didn’t.  I feel sorry for those who jumped out of the market and converted to cash.  They have missed a lot of opportunity for growth.

Are we going to experience a bear market in the future?  Absolutely.  But, I can’t tell you when it will show up. I can’t tell you how severe it will be. I can’t tell you how long it will last.  But I do know that there will be one eventually.  I’m also quite sure that investors who are familiar with bear markets will fare better than those who aren’t.

So here, in no particular order, are 22 things I think every investor should know about bear markets.

  1. What is a bear market? The term is sometimes thrown around loosely. But there’s a real definition that’s generally agreed on: A bear market is a downturn of 20% or more, lasting at least 60 days, in any broad equity index such as the Dow Jones Industrial Average, the S&P 500, or the Nasdaq.
  2. A bear market is triggered when investors lose faith in the market as a whole — decreasing the demand for stocks. This tends to happen when the economy enters a recession, unemployment is high and inflation is rising.
  3. Bear markets are normal, but not predominant. Over the past 200 years, the stock market has risen more than it has declined. The bear accounts for only a minority of the history of the market — but that minority is pretty unpleasant.
  4. Bear markets don’t last forever. Bear markets last, on average, for 10 months.
  5. Bear markets can be relatively mild or quite harsh. The average bear-market loss was 35%. The smallest loss was 21% in 1949; the worst was a drop of 62% from November 1931 to June 1932.
  6. Many of today’s investors have lived through two fairly nasty bears: a decline of 58% from 2000 to 2002 and a 57% plunge from 2007 to 2009.
  7. Bear markets spook investors who aren’t prepared for them. Millions of investors are still nervously on the sidelines following the market rout of 2008. By remaining in cash, they have missed out on a strong, sustained recovery
  8. The history of the markets isn’t entirely bad. The 25 bull markets since 1929 have lasted an average of 31 months — three times as long as the average bear market. Also encouraging: The average of these bull markets sent stocks up 107%.
  9. Like bear markets, bull markets come in all sizes. The smallest bull-market gain was 21%; the largest was 582%, from 1987 to 2000. That prolonged bull market started right after a sudden decline (widely regarded at the time as a crash) in which the market lost 22% in just one day.
  10. Just as a bear market can scare off investors, a prolonged bull market can lead investors to think that market risk is nothing but an outmoded concept. Early in 2000, after nearly 13 years of a bull, millions of investors were stunned when a serious downturn began in the spring.
  11. Bear markets don’t last forever. I’m not saying it couldn’t happen, but it hasn’t happened yet. Perhaps the main reason is that broad market indexes are made up of so many stocks.
  12. I know of one guaranteed way to absolutely protect yourself from a bear market: Don’t ever invest in equities. However, this guaranteed protection has a high cost: You’ll never obtain the gains from bull markets.

The point of all this information isn’t to depress you, but to warn you. We will in the future experience a bear market.  It is inevitable.

My advice is simple: Keep your expectations in check, be patient, and take the long view.

— Nikki Earley