What is a Bear Market? The Ultimate Beginners Guide in 2023
Since January 4th, 2022 the S&P 500 has dropped 25% from its all-time highs.
This has left a lot of investors to ask themselves, should I sell out of all my stocks? Should I pile a lot of cash? Should I continue to buy the dip?
Bear markets can be very painful times or tremendous opportunities. Nonetheless, bear markets are a natural phase of the cycle.
The Ultimate Beginner’s Guide to What is a Bear Market:
- The History of Bear Markets
- How Long do Bear Markets Last?
- Tips for investing in a Bear Market
- What Kind of Stocks Should you Buy in a Bear Market?
- Position Sizing in a Bear Market
- The Type of Companies to Buy in a Bear Market and During a Recession
- What Happens if the Market Continues to Decline?
- Can you Pick a Market Bottom?
The History of Bear Markets
A market is considered a bear market when the market drops -20% from its all-time highs.
The average bear market of the S&P 500 is about 9.6 months long and the average of the S&P 500 drop is about -36%.
| Dates | Percentage Drop | Duration |
| 9/7/1929 – 11/13/1929 | -44.7% | 67 days |
| 4/10/1930 – 12/16/1930 | -44.3% | 250 days |
| 2/24/1931 – 6/2/1931 | -32.9% | 98 days |
| 6/27/1931 – 10/5/1931 | -43.1% | 100 days |
| 11/9/1931 – 6/1/1932 | -61.8% | 205 days |
| 9/7/1932 – 2/27/1933 | -40.6% | 173 days |
| 7/18/1933 – 10/21/1933 | -29.8% | 95 days |
| 2/6/1934 – 3/14/1935 | -31.8% | 401 days |
| 3/6/1937 – 3/31/1938 | -54.5% | 390 days |
| 11/9/1938 – 4/8/1939 | -26.2% | 150 days |
| 10/25/1939 – 6/10/1940 | -32.0% | 229 days |
| 11/9/1940 – 4/28/1942 | -34.5% | 535 days |
| 5/29/1946 – 5/17/1947 | -28.8% | 353 days |
| 6/15/1948 – 6/13/1949 | -20.6% | 363 days |
| 8/2/1956 – 10/22/1957 | -21.6% | 446 days |
| 12/12/1961 – 6/26/1962 | -28.0% | 196 days |
| 2/9/1966 – 10/7/1966 | -22.2% | 240 days |
| 11/29/1968 – 5/26/1970 | -36.1% | 543 days |
| 1/11/1973 – 10/3/1974 | -48.2% | 630 days |
| 11/28/1980 – 8/12/1982 | -27.1% | 622 days |
| 8/25/1987 – 12/4/1987 | -33.5% | 101 days |
| 3/24/2000 – 9/21/2001 | -36.8% | 546 days |
| 1/4/2002 – 10/9/2002 | -33.8% | 278 days |
| 10/9/2007 – 11/20/2008 | -51.9% | 408 days |
| 1/6/2009 – 3/9/2009 | -27.6% | 62 days |
| 2/19/2020 – 3/23/2020 | -33.9% | 33 days |
How Long do Bear Markets Last?
During the housing market crash in 2008, the bear market lasted 408 days and the S&P 500 dropped by more than 50%.
And our shortest bear market was in March 2020 during the Covid Pandemic. The 2020 bear market lasted 33 days and the S&P 500 dropped -33.9%.
Bear markets, on average, happen every 3.6 years. To date, bear markets only make up 22% of the entire stock market history. This means, stock market are bullish 88% of the time.
Tips for investing in a Bear Market
Here are 3 tips you can utilize if you’re questioning what you should be doing during a bear market.
Tip #1: Sell non-profitable or highly speculative stocks
Companies that are not profitable or speculative stocks may drop more than 50% of its value during a bear market.
Pro tip: You can take a loss on a stock and use it as a tax write-off and buy some higher quality stocks.
Tip #2: Continue to Buy the Dip
If you’ve been investing in high quality, proven companies or ETFs, then you may want to consider buying the discounted stock.
If history is any guidance, high quality stocks & ETFs always rebound harder and stronger after a bear market.
Tip #3: Buy the Dip Every Week or Month
When you’re buying quality high stock or ETFs, you don’t want to buy in a bulk. You want to buy stocks on a weekly or monthly basis.
Instead of being fearful during bear markets, you can turn your fear into opportunities.
What Kind of Stocks Should you Buy in a Bear Market?
This is not financial advice, but here are 4 companies that I believe will have great success during a bear market:
Stock #1: Coca-Cola ($KO)
$KO has a market value of $256.27 billion, and has a dividend yield of 2.97%.
It has proven to have great revenue earnings during the toughest of times.
Stock #2: Apple ($AAPL)
$AAPL has a $2.2 trillion market cap, and is one of those companies that even though they may take a hit during bear markets, it will always rebound.
It’s not a company that is going to run out of business at the moment.
Stock #3: Bank of America ($BAC)
Having a bank company as part of your diversified portfolio is a wonderful addition. What makes $BAC a great company is its sensitivity to interest-rates.
As the Federal Reserve has been raising interest rates as such a rapid pace, Bank of America has enjoyed this type of surge.
Stock #4: UnitedHealth Group ($UNH)
Adding a healthcare company is a great defensive stock choice during a bear market. Healthcare companies provide a health return during bear markets.
This is because people are always going to need healthcare services. And as the country population continues to grow, healthcare will be growing with it as well.
Position Sizing in a Bear Market
During bear market, it’s important to size down on your positions. Bear markets are unpredictable, and you want to make sure that a position size doesn’t dictate the direction of your account value.
Try to diversify your stock portfolio with sizes no more than 1 to 3 percent of your account. So in the case of one bad stock doing bad, it doesn’t drag your portfolio down.
What Happens if the Market Continues to Decline?
If the market continue to decline, you should ask yourself, does it really matter if the stock falls another -20% if I’m planning on holding for the long term?
Buying your favorite companies on a regular basis that have great, solid foundations, and sticking with them may present their opportunities after the short-term bear market.
During difficult times of recession, war, and any other obstacles, great companies will always prevail and make through those difficult times.
History has proven that after market downtimes, comes with period of growth.
Can you Pick a Market Bottom?
A lot of investors try to buy once the market has bottom. The challenge is that, even for professionals, it’s difficult to pick the very bottom. It’s nearly impossible to pick the market bottom.
Instead…
When you see strong pulldowns on your favorite stocks, buy a little bit. Continue to exercise your purchasing power on solid, and grade A companies.
