Investing in a bear market

There comes a time in every market cycle when investors sell their stocks en masse. While there’s not much you can do to avoid short-term losses, that doesn’t mean you should join the herd. In fact, a bear market — defined as a peak-to-trough decline of 20% in equity assets — can be an opportunity to buy quality investments at a discount, which can help you build long-term wealth.

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What is a bear market?

Markets rise and fall all the time, but only when they drop by 20% or more are stocks considered to be in bear market territory. In 2022, U.S. stock markets met that definition when the S&P 500 fell by more than 20% between December 2021 and June 2022. (Canada’s market experienced a less severe pullback during the same period, which is more generally called a correction.) While the term's origin has been lost in the mists of time, in market parlance, bears are associated with pessimism and bulls with optimism. 

Bear markets typically occur when a significant change in market conditions causes corporate profits to decline, or valuation multiples — the ratio of stock price to earnings or book value — to contract. Or both. These changes can happen for many reasons, such as: a rapid increase in inflation and interest rates (as happened in 2022); an asset bubble reaching a breaking point (as happened in 2008 with housing or in
2000–2001 with internet stocks); or something else that causes investors to lose confidence (as happened during the COVID-19 lockdowns in 2020). Bear markets often precede or coincide with an economic recession.

During a bear market, the flow of money coming into stocks slows to a trickle, while the money coming out increases. Many investors opt to sell their stock holdings, often at a loss. Where does all that dough go? It may stay as cash in bank accounts or be reallocated to lower-risk assets such as government bonds. As stock prices fall, a great deal of market capitalization simply vanishes.

The average length of a bear market — and there have been 13 in the U.S. since World War II — from peak-to-trough is 389 calendar days. Many investors today have indelible memories of the 2008 – 2009 crash, which was more severe than most. It lasted 517 days, from the market peak in October 2007 to the bottom in March 2009. 

Bear vs. bull market

A new bull market has begun once a bear market reaches its bottom and stock prices start rising again in a sustained way. Where bear markets are characterized by worsening economic conditions, in bull markets those clouds start to dissipate. Inflation comes down and consumer spending stabilizes and even starts to increase again. Bull markets tend to last much longer than bear markets do — the entire decade from 2010 to 2019 was a bull market.

A bull market may still feature pullbacks, including corrections of between 10% and 20%. Corrections usually happen when asset prices climb faster than investors might expect, particularly when reviewing company fundamentals, such as corporate earnings. If prices get ahead of themselves, valuations can reset, but it may not change the allocation of resources in the economy, as in a bear market. For example, the “Great Recession” bear market of 2008 – 2009 saw the U.S.’s mighty housing market become a much less important part of its gross domestic product. 


How to trade in a bear market?

Even the savviest investors can’t tell in real time when the market has peaked or bottomed. As such, investors who try to "time the market" run the risk of selling some of their investments at lows and missing days of strong growth. Investors who have longer time horizons may be able to take advantage of a bear market to build wealth for the future. Here are some key tactics:

Controlling Emotions

Stock prices tend to fluctuate more than their intrinsic value would suggest because of human emotions. Assuming you’ve bought well-run companies with solid business plans, they may rebound eventually. Selling locks in any losses.

Seeking calmness 

It sounds counterintuitive, but a few ways to  help benefit from volatility in the long term is to tune out the noise and keep doing what you were already doing: For example, make regular contributions to your savings, rebalance your holdings at least once a year, compound your savings with dividends and wait it out. Over longer periods, major stock markets have rewarded those who wait with returns that can comfortably beat inflation. 

Consider diversifying your holdings

During bear markets, almost all securities experience a price decline but not necessarily by similar amount, and a well-diversified portfolio can potentially lessen the impact of market downturn. Hence, investing across a range of asset classes, sectors and geographies can help minimize your portfolio's volatility.

Consider a defensive play 

Some stocks may be less volatile than others. You can check out how volatile a stock is by examining its price movement and comparing it with the stocks in the same industry or overall stock market. Generally, companies with a large market capitalization, consistent profits, ample dividends, relatively low debt and wide “moats” (protection against competition, for example, such as in highly regulated industries including telecommunications, utilities, banking, energy and railroad building) are considered to be less volatile. These companies also tend to cluster in sectors that people have to spend money on in good times and bad, such as consumer staples and residential rental housing. 

Dollar-cost averaging

Instead of squirrelling away money whenever you think of it (for many, that means RRSP season in February), set up monthly or biweekly contributions to your savings. Not only does it ensure you pay yourself first, setting up automatic contributions can help you take advantage of market fluctuations. When you make the same dollar-value contribution every month, you are able to buy more of a security when the price is down than you can when the price is up. In other words, you’re buying low, one of the keys to successful investing, without even thinking about it.

Tax-loss harvesting

This applies to holding investments in non-registered accounts, which are subject to tax. Beaten-down stocks or funds in a portfolio can typically be sold at a capital loss (the difference between what you paid for the investment and what you sold it for). You might then use that loss to offset other income in the same or even future tax years. Typically, these may be securities you wanted to get rid of anyway, not ones you think are ripe for a rebound. 

Keep an eye out for signs of a recovery

While investors can’t predict a bottom or a top, you can get a sense of when the market may recover. If a few quarters of job losses are followed by a couple of months of job gains, that could be one sign of economic recovery. A return to more normal inflation (typically considered to be in the range of 2% – 3% increase per year) may also indicate that a more normal economic and market environment may be on its way. Consider if you should be making any big moves based on better news, to help manage investment anxieties.  

Having said that, a bear market can be a good time to put your dollars to work. Consider this investing example in a bear market: Some stocks a year ago are on sale and can be discounted, making them attractive to investors. It might take a year or even several for them to recover their lost value, consider if this aligns with your time horizon. What matters is building wealth for the long term, and a bear market can be as good a time as any to do that.

Frequently asked questions

What does a "bear" mean in stock market?

A bear market is defined by a decline of 20% in equity assets. In 2022, U.S. stock markets met that definition when the S&P 500 fell by more than 20% between December 2021 and June 2022. Generally speaking, bears are associated with pessimism while bulls are associated with optimism. 

Can you make profits in a bear market? 

There are a number of ways investors can consider, here are a few examples: making regular contributions to their savings, rebalancing their holdings at least once a year, compounding savings with dividends and waiting it out.

How can I protect my money in a bear market?

One of many ways to protect your money through a bear market can be through diversification. Consider the 11 Global Industry Classification Standard (GICS) sectors that include Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Real Estate, Communication Services and Utilities

For example, some stocks may be less volatile than others. Also, be cautioned of over diversification risk.

What investments do well in a bear market? 

Some stocks may fare better than others through a bear market. These so-called defensive stocks tend to have large market capitalization, consistent profits, ample dividends, relatively low debt and wide “moats” (protection against competition, for example, such as in highly regulated industries such as telecommunications, utilities, banking, energy and railroad building).

How long do bear markets usually last?

The average length of a bear market from peak-to-trough is 389 calendar days. Many investors today have indelible memories of the 2008 – 2009 crash, which lasted 517 days and was considered more severe than most. It fell from a market peak in October 2007 to a market bottom in March 2009. 

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