When the S&P 500 Index dropped by 20% on May 20th, 2022, from its record high in January 2022, investors worldwide were quick to declare a bear market. Both investors and Wall Street are spooked, to say the least, investors are contemplating selling their stocks, and everyone is waiting for the bear to turn into the bull.
But what is the bear market? More importantly, should you be worried about it? Let’s find out.
What is a bear market?
Simply put, a bear market is a prolonged period during which the prices of stocks fall consistently. When this continues for a long time, investors become wary of buying stocks, causing a further drop in stock prices. This cycle continues and the stock prices keep falling.
For investors, however, a bear market is whenever there is a downtown of greater than 20% in multiple broad market indices over two months. This includes Sensex, S&P BSE, or similar.
Now we know what a bear market is, the obvious question is what causes it?
What causes a bear market?
Plenty of factors can lead to a bear market-like situation. A few common reasons for bear markets over the years have included-
- Global health crises or pandemics
- Low periods of economic growth characterised by low employment rates, high inflation, low disposable income, etc.
- Geopolitical crises
- World recession
- Tightening of fiscal policies, to name a few.
In simple terms, any situation wherein there are more sellers than buyers can lead to a bear market.
What does a bear market mean for you?
When stock prices fall sharply for a long duration, some investors will start selling their assets since they are unsure when the market will bounce back. This means you could do one of two things, follow the trend and sell your stocks or buy stocks while they are low and sell them off when the market values them higher. But when there’s no telling which stocks will bounce up, should you really take the risk?
How to survive a bear market?
A bear market typically lasts between a few months to a little over a year, going by past trends. So, you can be assured that the market will bounce back. While there’s no telling when this will happen, there are a few ways to tide through the situation.
Invest in stocks that do well during downturns
This may mean investing in stocks of industries like food, personal care and utilities to reduce losses.
Hedge with bonds and dividend stocks
Bonds prices go up when stock prices fall. Hence, investing in them during a bear market is a good strategy. However, invest in safe bonds like short-term or investment grade bonds that are safer in nature to avoid losses.
Investing in dividend stocks of companies ensures you get a minimal income even if the company’s stocks fall. This can help you combat losses in a bear market.
Buy short- and long-term puts
Buying puts in a steadily falling bear market can give you some gains during the period. When you buy a put, you buy a small number of shares of a particular company for a short period and sell them at a stipulated price at the end of the term. In a steadily falling bear market, you can be assured that the selling price of the put will be much higher than the price of the stock, meaning you can get a return.
Over to you
It’s only natural to panic as an investor when stock prices keep falling. However, bear markets are temporary, and markets tend to bounce back in a few months. So, sit tight and tide over the situation by investing smartly.
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