Savvy stock market investors quickly learn not to get too excited when prices go up and not to get too depressed when prices drop. Wall Street has proven itself to be cyclical in nature. Recognizing trends in the market can help us to become better and smarter investors. December gives us a perfect point to leave 2015 behind and learn eight things about a bear market.
A drop in stock prices of at least 20 percent that extends over a two-month period is a bear market. If a decline in prices in December does not last for at least two months, it is a correction and not a bear market.
What causes a bear market?
A bear market occurs when investor demand for stocks declines due to a generalized lack of faith in the market instead of investor dissatisfaction with a particular stock.
When do bear markets usually happen?
Economic recessions along with high unemployment and inflation are usually associated with a bear market.
How prevalent are bear markets?
Surprisingly, investors in Mission Viejo may not realize that bear markets are not the norm. We just remember them more than periods of increasing stock prices because of the economic turmoil that usually accompanies a bear market.
Can bear markets be predicted?
Predicting bear markets is difficult. They occur every three and a half years or so, but we have historically been unable to pinpoint when the next one would happen.
How long do bear markets last?
On average, bear markets are usually of short duration lasting only 10 months.
How can we protect ourselves from a bear market?
The best way to avoid the effects of a bear market is to stay out of the stock market. Keeping money in the bank instead of invested in stocks may keep us from losing during a period of declining stock prices, but it will also mean that we will never realize the gains that come when stock prices go up in a bull market. The best protection is to diversify.
How does diversification work?
If we have all of our investment money in stocks, we leave ourselves open to the impact of a bear market. We can avoid this by putting some of our investment capital into bonds or into mutual funds that invest primarily in bonds to lessen the effects of declining stock prices.
To learn more about Bear Markets, call Bart Zandbergen CFP® at (949) 297-8318 or visit his website.