We talked recently about bull markets, so now it’s time to look at the opposite, bear markets. You may remember that these terms are named how each animal attacks - a bull thrusts upward with his horns, but a bear swipes downward with its paws. So, a bull market is one that is trending up and a bear market is one that is trending down. Typically, these are periods of rising or falling that last months or years, otherwise it’s just normal fluctuations.
So what does this have to do with you and your Paychecks? Well, the economy is always doing something – both up and down – and if you want to make money then it helps to know at least a little bit about it. With a little savvy you can make your investments (i.e. future Paychecks to yourself) better even if the markets are trending down.
Here are Five Fast Facts on bear markets:
- 🐻 What Is It? - A bear market is generally considered a period of prolonged price declines of about 20% over the course of at least two months, along with widespread pessimism about the economy. It’s usually a term used for the overall market or an industry segment, but it can also apply to individual stocks or investments. There’s no official position on which kind of bear, though we think that the polar bear is definitely the coolest (ha ha, aren’t dad jokes great?).
- 😞 What Causes It? - A lot of things can cause a bear market: a weak or sluggish economy, market bubbles, pandemics, wars and other geopolitical crises, just to name a few. The government can trigger one, too, if there are major changes in the tax code or federal interest rates. Basically, anything that makes lots of investors cranky.
- 🔭 Go Long - The good news is that low risk investments have almost the same return as high risk investments over the long term. Sure, they’re boring…but their charm (and success) is in their lack of risky behavior.
- ⏲️ Prepping For A Bear - Markets rarely shift completely in a short period of time, so you’ll likely see a bear market coming if you’re paying attention. When that happens, diversify your portfolio to reduce your risk. And above all, stay calm. Fear and greed are what can kill you (financially)...everything else is recoverable with time.
- 🚀 When The Bear Arrives - Legendary investor Warren Buffett suggests you go all in when the markets are down. He knows that over time, the American economy has always rebounded and performed well, so he buys in low and waits it out until prices get high again. And there are ways to take advantage of tax loopholes to reduce your losses along the way, too. Yes, you will almost certainly lose some at the beginning, but if you have a balanced portfolio and enough cash to get by, you’ll weather the storm and come out better on the other side.
🔥Bottom line: Definitely get with your financial planner on this one! Talk through how to prepare, and make sure you understand the signals of a bear market and what to do when one gets close. There’s pain in the short term, but the long term can still be a net win for you. And your future self’s Paychecks, of course.
What do you think about bear markets?
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