What is a bear market and how not to lose money

What is a "bear market"

This is the period when asset prices fall for a long time. It is no coincidence that the name mentions bears: during an attack, these animals knock the victim down and tear it apart. It looks like there are bear investors who make money on falling prices.

There is no clear definition of how much assets should decline in value. Usually a "bear market" is spoken of when prices fall by at least 20% in comparison with the nearest peaks, and the process lasts longer than two months.

The value of any asset can collapse - from stocks and bonds to real estate and industrial metals. Sometimes certain types of assets or even specific securities fall, and this is also a "bear market", but only in a certain industry or country.

A bear market differs from a “correction”, that is, a short-term decline in the value of assets, by its duration: on average, it continuesBull and bear markets - historical trends and portfolio impact / Invesco about a year, but sometimes longer.

Unfortunately, crises are an inevitable part of the economic cycle, as is growth during “bull market». It is impossible to single out a universal reason for what is happening. These can be market “bubbles”, political and military problems, slowdown in economic growth, and so on. The fall is usually aggravated by the investors themselves, who first believe in success to the last, and then begin to panic. As a result, assets are sold, volatility jumps and prices go down.

So the Great Depression cameStock market crash of 1929 / Federal Reserve History following the “margin bubble”, when investors preferred to borrow rather than invest their money. And the 2008 financial crisis happenedHistory credits Lehman Brothers' collapse for the 2008 financial crisis. Here's why that narrative is wrong / The Brookings Institution due to delays in mortgages.

What Happens Before and During a Bear Market

Typically, bear markets are divided into three stages: start, rally and end.

A fall is always preceded by a growth time - a "bull market". But one day, the speed of economic development and the expectations of investors do not converge. Assets are much more expensive than their fair price, for example, companies can estimate at 100–150 annual profits with a notional rate of no more than 30. At the same time, the real situation is deteriorating and it becomes more difficult for firms earn and invest in development.

And then some unpleasant event happens, like the technical default of Lehman Brothers, and the market crashes. Then comesWhat is Rally? / Corporate Finance Institute rally. This is a deceptive period: asset prices jump up and down, sometimes even steadily rising for many days and weeks in a row. Due to the high volatility, it is unclear whether the market has bottomed out and is now recovering, or whether a real crisis is still ahead.

At the end of the bear market, price surges calm down. Assets are slowly, steadily and sadly declining. Such a large-scale economic crisis can last for months or even years. However, businesses are gradually recovering, people are starting to buy goods again, and investors are starting to invest in assets that have fallen in price. ComingBusiness Cycle Dating Procedure: Frequently Asked Questions / National Bureau of Economic Research new bull market.

How an investor can protect himself from a bear market

It is very difficult to predict a large-scale crisis, as well as to immediately determine the difference between a small correction and a long decline. Economists and financial analysts are trying to measure multipliersstudy industry data, volatility indices and investor sentiment. And although sometimes the forecasts of specialists turn out to be correct, it is much easier to insure in advance.

Diversify your portfolio

If capital is split into different assets, then the price decline will not be as painful. Stocks, bonds, cash, real estate, gold and bitcoins cannot all fall at the same time and by much. Investor with a wide diversified the portfolio will lose less than its colleague, which was invested only in technology or oil and gas companies.

Diversification will not save you from losses in a large-scale crisis. But it is better to lose 25% than 40-50% on individual risky investments.

So, in 2008, almost everything collapsed on the stock markets. But a diversified portfolio that mixes a wide variety of asset classes has shownGuide to the Markets - 2021, p. 61 / J. P.Morgan Asset Management themselves are much better than most of the individual positions.

Keeping bonds and assets out of "defensive" sectors

Most often, during crises, prices of risky assets fall, while bonds states with a stable budget or large reliable companies retain their value. Therefore, with the possible approaching economic crisis, it makes sense to purchase more bonds.

It is also worth taking a closer look at the shares of companies from the "defensive" sectors. Firms from similar industries either do not lose money during crises, or even earn more. You can pay attention, for example, to consumer goods (PepsiCo, Walmart, Magnit), telecommunications (Google, Rostelecom), healthcare (Pfizer, UnitedHealth), utilities (Consolidated Edison, RusHydro) and some industrial companies (Polyus, ExxonMobil).

Have free money

It never hurts to keep part of your portfolio in cash, that is, to have money that is not invested in anything in a brokerage account. Or at least short-term bonds: they are easy to sell at any time, and they bring little money. An investor with free money will be able to adjust his own portfolio at any time and even buy promising assets are cheap.

How an investor should behave during a bear market

If the crisis has already arrived, you need to act wisely.

Don't panic or sell off assets

The "bear market" does not last forever, one day the economy will start to grow again and assets will regain their value. Therefore, it is better not to part with good investments for next to nothing.

Losses on charts and in brokerage applications are “paper”, not real. Losses will become real only when the investor sells the securities and sees less money on the account than he invested. Prior to that, losses, in fact, do not exist.

Moreover, a sell-off can drag the market down for a long time. For example, during the 2008 crisis, the indices reachedDow Jones Industrial Average, Feb 1, 2008 - Mar 10, 2009 / Yahoo Finance the minimum was only on March 9, 2009, more than a year after the start of the recession. So do not repeat after other shy investors and rush to sell assets.

Don't play with shorts

Short-term deals, speculation on prices, rates on the market fall - the field of work of professional traders. They know where to look, what to trade and how to react in a split second. A private investor rarely has the time and energy for such a thing. This means that it will be very difficult to beat the trader.

Especially - on the margin trading field, when the rate on the fall of some stocks and loans on this from the broker. Even traders are not always capable of such a risky strategy, but it threatens with serious debt.

Other speculations on price surges during a crisis are also a dangerous way to make money. If you really want to, it is better to highlight a piece of the portfolio that you do not mind losing. In a situation like this, you are more likely to play in the casino than to make any kind of safe investment.

Pretend there is a sale

Additional profits in the bear market are quite possible, you just need to carefully select investments. Especially if the investor knowswhat he wants, sees promising companies and expects profits not today, but in the future. Then every bear market is a gift. This is a chance to invest in good companies at a lower price. It is no coincidence that Warren Buffett advised, "Be fearful when the market is greedy, and be greedy when the market is fearful."

Let's say an investor believes in the success of Gazprom, but since December 2019, the company's shares have collapsed - by July 2020, they will loseDynamics of the price of Gazprom shares, $ GAZP. December 1, 2019 - August 1, 2020 / Yahoo Finance 24,4%. Just a little over a year later, the company got out of crisis and is much more expensive. Both ways - to invest in 2019 and in 2020 - are profitable, but the difference is huge.

In this case, it is not necessary to wait for the very bottom of the "bear market". Still, no one knows when this will happen: for Gazprom shares, for example, the lower limit was October 2020, then the investment would have brought as much as 109.3%.

It is better not to guess, but to choose an averaging strategy. The bottom line is to just buy assets - every month, quarter, six months, or a year. Invest in companies that the investor considers suitable for his purposes, regardless of the price. It is not as profitable as guessing the bottom and the peak of the price, but it is more realistic.

What is worth remembering

1. "Bear market" - a time when assets fall sharply in price by 20% or more. Such a crisis can affect any investment, from stocks to bitcoins, and on average lasts about a year.
2. Investors should not be afraid of the bear market, it is a natural part of the economic cycle. After a long growth, a recession is inevitable.
3. Nobody knows when the next crisis will start. But you can prepare: diversify your investment portfolio, buy additional shares companies from the "protective" sectors and put free money on the brokerage account.
4. During a bear market, the main thing is not to panic and not give up all your assets for next to nothing. Better to calm down and imagine that there is a sale with huge discounts around.