What is a Bear Market and How Should You Smartly Invest During One?

Introduction to a Bear Market – The What, Why, and How Long

What Is a Bear Market?

A bear market is, very simply put, any single stock or index that experiences a severe decline in value over a sustained period of time. The technical benchmark is this: if a stock or index falls more than 20% from recent highs, then this stock or index is considered to be in a bear market.

Quick note: An index is a collection of stocks. For example, the Straits Times Index (STI) is a name we give to all the stocks of Singaporean publicly-traded companies.

So the value of one or a couple of companies’ stocks is falling. Why is this happening and what does this mean?

Why Do Bear Markets Occur?

This is not a straightforward question to answer mainly because a bear market can happen for many reasons.

Experts believe that the S&P 500 Index (the collection of all American stocks) is currently in a bear market largely due to the economic hits from the pandemic. The last time we saw a significant bear market was during the 2008 financial crisis.

Other common reasons could be international conflicts, geopolitical crises, industrialisation, and many more.

How Long Do Bear Markets Last?

The duration of bear markets can vary in length depending on global situations such as the pandemic and the various government policies being put into place. No two bear markets are the same, so it can be difficult to estimate exactly how long this one would last.

Generally speaking, bear markets can last anywhere between weeks to years. The average duration of a bear market is about 359 days (approximately 12 months). But every bear market is a unique one, and the duration of this particular bear market can be longer or shorter depending on its distinctive economic conditions and reactions.

Consequences and Implications of a Bear Market

After hearing all that some of you may think that a bear market spells doom and gloom with no clear end in sight. To some extent, that is true. Bear markets generally do indicate tough times.

On a macroeconomic scale, bear markets can mean slowing down of business growth. This could translate into falls in public investment, and dips in gross domestic product. To say that a bear market will lead to a recession is quite a stretch because there are so many factors at play, but the possibility is always there.

On an individual level, the biggest hit would probably be that downward sloping line indicating your stock portfolio performance. This can be quite steep in some cases and may cause you some alarm.

Essentially, a bear market means that some businesses could be struggling to get by and investor confidence is wavering.

But one important thing to note is that bear markets are not uncommon. We have seen tons and tons of bear markets in the last couple of years in all types of economies all over the world. And what’s more, most indexes have seen a great recovery post bear market.

Bear markets can be troubling, but the good news is that they do not last forever.

Tips to Survive a Bear Market

1. Consider Value Over Price

During a bear market, the stock prices can get a little haywire without much stability. At this juncture then, it is more important to determine the worth of the stock or commodity, rather than simply looking at its price.

A bear market exposes which companies are simply riding the wave of the good economic outlook and which have the financial prowess to last the test of time. So take this as a sign to consider which goods and services can survive the long haul. Think about which businesses have the positive leadership and operational quality to overcome this economic turbulence, and perhaps more to come.

Some questions to ask yourself before investing in a bear market would be the following. Is this good or service essential in some way? Is this a good business with steady operations and a solid track record? Will this company and its products still be relevant in decades to come?

To some, these questions point to ETFs (exchange-traded funds) or index funds. For others, the solution might be blue-chip stocks, commodities like precious metals, or even real estate. Regardless of what it is, if you find yourself saying yes to the questions posed above, then this stock/commodity/index may be worth investing in, even in the face of a bear market.

2. Trade Consistently

Value investing or dollar-cost-averaging is an investing technique first coined by two professors at Columbia Business School, and further popularised by Warren Buffet later on. The idea itself is super simple: continually invest a sum of money in regular intervals (this can be a day, a month, or a year), with the intention of holding your shares for a really long time.

What this essentially does is average out the highs and lows of the stock market prices. A stock or index fluctuates normally but can be even more volatile during a bear market. You can end up seeing sudden dips and quick rises that are rather hard to predict. So instead, by investing recurrently, you will purchase stocks at all kinds of prices, which then average out to be a lower dollar cost per share.

3. Learn How to Study the Market

Instead of diving head first into investing because the prices are so low, or copy trading to regurgitate the success of big hedge funds (which by the way, is not a good idea), take this time to learn more about investing.

Channel the energy and stress of staring at the negative numbers into a productive activity by discovering more about how investors use charts to navigate the market. Pick up the tools of the trade by reading books or listening to podcasts on investing and financial literacy. Keep up with the market and hone your skills by tuning into trusted news sources.

Panicking and selling all your securities off can be tempting in face of an economic downturn but it is much easier to think of the bear market as simply a chance to learn more, make more calculated trades, and be more careful with your money.

4. Diversify your portfolio

At this point, you may have heard this phrase over and over but that is because it is incredibly effective in reducing risk and minimising losses. Especially in the context of a bear market, you want to cushion falls in overall portfolio performance as much as possible. By diversifying your portfolio, you do exactly that. Even if one stock isn’t doing as well as you would have hoped, there are others that could be performing much better.

Investing in competing companies in the same industry, investing in different industries, and having multiple types of investments (i.e. stocks, bonds, fixed deposit accounts, etc.) can all help your portfolio become more diversified.

Check out this page that breaks down all the different types of investments available in Singapore.

5. Lower Commissions as Much as Possible

Lowering the commission you need to give to your brokerage is important to maximise your returns, especially in a bear market where things are more uncertain than ever.

Commission fees can actually take up a decent chunk of your costs, especially when you plan to invest for the long run. If you are trading in the thousands and more, do not be surprised if your commissions cost you up to hundreds of dollars.

This is why choosing a brokerage with the best and lowest commission rates is essential to survive a bear market. Our personal pick would be uSMART.

uSmart: Singapore’s Latest Online Brokerage

uSMART is a MAS-regulated brokerage that has some of the lowest commissions on the market. Compared to popular trading brokers like Tiger or moomoo, uSMART is currently running a promotion until the end of 2022 that allows traders to trade and invest at no costs.

uSMART also boasts additional features such as a learning hub, as well as insights and market analysis generated from big data to help out novice investors. With many investment options including fractional trading, uSMART is one of the best brokerages on the market to help you optimise your investments in the long run, especially in the face of a bear market.

Conclusion

Now that you know more about bear markets, you would have come to realise that they are a common occurrence. While they can seem devastating in the short run, more often than not the economy bounces back, and everything returns to normal soon enough. To counter the short-term effects of a bear market, adopting a long-term mindset by consistently trading, diversifying your portfolio, and using sites with low commissions like uSMART is the way to go.

Additional Resources

This article was written in collaboration with uSMART. While we are sponsored by them, we still review products and services with an objective lens and stay true to our mission–providing you with the best recommendations and advice to make smarter financial decisions. Investments are subject to investment risks including the possible loss of the principal amount invested. Past performance is not necessarily indicative of future performance. This advertisement has not been reviewed by the Monetary Authority of Singapore.