What is a bear market and how does it affect investments?

Posted by on 27/07/22

The term bear market has hit the headlines recently as stock markets tumble, but it’s not a reference to the cuddly type. The expression is used when equity markets fall by at least 20% from a recent peak. They can be grizzly words for a new investor to hear, but it’s important not to panic.


How long does a bear market last?

Bear markets are common, tending to occur every three to four years. Like their namesakes, some are fiercer than others. The deepest recorded bear market cut a nail-biting 55% off typical investments over 13 months before it finally ended in 1938. When the dot-com bubble burst in 2000, the S&P 500 slumped by nearly 40% in 18 months.

Fortunately, most bear markets are shorter-lived, tending to even out after 9 to 12 months. The last big bear market was in 2020 amid the Covid-19 pandemic and lasted just 33 days.

How do bear markets affect investments?

Although individual stocks may behave differently, when a market turns bearish nearly all stocks tend to decline, negatively impacting an investment portfolio. A bear market can also signal a recession or depression.

Even though bear markets are mostly short-lived, it can take some time before markets fully rebound. When, during the sub-prime mortgage crisis of 2008, S&P dropped by 50%, it took nearly seven years to recover.

But it’s not all bad news. Some sectors – such as staple goods and utilities – weather the storm better than others, so having a diverse portfolio can help minimise the loss.

“Having a mix of assets is always a good idea, but particularly so in a bear market,” says Saisha Moyce, Private Client Manager at Brooks Macdonald. “Although not always the case, as we have seen more recently, Bonds can be steadier in volatile times because they diverge from stocks.”

Should I invest during a bear market?

Seeing investments plummet can be alarming. It may be tempting to pull money out through fear of further loss but this, according to Investment Manager Phoebe Chamier, could be short-sighted.

“Staying invested during market unpredictability is often the better option,” she says. “If you’re looking long-term over the next 10 to 20 years or longer, bear markets are inevitable and it’s best to ride the storm. They can even prove a great opportunity to build wealth while prices are depressed, but none of that comes without risk.”

So will we see a bear market in 2022?

In the US, the threat is too late to tame. Stock markets in Europe have, so far, been more resilient. Whatever uncertainty may lay ahead, Phoebe is sure of one thing:

"Investing to meet your future goals takes patience and balance. It’s important to find a good investment manager who really understands your aspirations and appetite for risk.”

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