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If you’ve been following the news, you may have heard that we’re in a historic bear market.
Of course, if you don’t follow economic news closely, this term may be new to you.
Today, we’ll define bear markets, the different types, why they happen, and how to protect your investments.
Bear markets and bull markets are terms to describe market trends.
A market is generally considered a bear market after stock prices drop 20 percent or more from their recent highest price.
The stock market often predicts what’s happening in the economy as a whole. If stock prices are down, investors lose confidence in the market and will often manage more conservatively or cut their losses.
Bull markets are the opposite. A market is generally considered a bull market when stock prices rise 20 percent.
Bull markets are harder to spot than bear markets. Many bull markets win the name in retrospect.
Bear market types
Bear markets come in two main types—cyclical and secular.
A cyclical bear market, also known as a primary bear market, is when the market drops 20 percent, but is followed by a recovery.
The recovery generally happens after months, not years, so cyclical bear markets represent a shorter-term swing in stock market prices.
A secular bear market happens when the market drops 20 percent, but takes longer to recover. Secular bear markets last for years, sometimes more than a decade.
During the lifecycle of a secular bear market, there will be smaller bull markets that raise stock prices, but those bull markets are overcome by larger bear markets that drive prices lower.
Another important term is a bear market rally. During a bear market, investors might gain confidence as stock prices rise for a short time. This causes an upward spike in the stock market before stocks fall again.
This short increase in stock prices during a bear market is known as a bear market rally.
Bear markets vs. corrections
A correction is commonly defined as a quick 10 percent drop in stock prices from a recent high.
Corrections are often confused as bear markets, but corrections are much less severe.
These types of drops don’t last long, as stocks regain their lost value and investors once again feel confident with their money.
Sometimes investors call corrections blips or hiccups in the market, as opposed to full-blown market trends.
What causes a bear market?
Bear markets each come from unique situations.
Experts often disagree on what causes a specific market trend, but most bear markets can at least be partly blamed on a slowing or weak economy.
If businesses report lower profits, if unemployment is high, or if the government intervenes with something like a financial bailout, then the economy could be on a downward slope.
This often carries over to the stock market, which can create either a cyclical or secular bear market.
The market now
Experts largely agree that we are now in a bear market due to the economic damage created by COVID-19 pandemic. How long the bear market will last is up for debate.
One thing is clear—this was the fastest change from an all-time high to a bear market in the stock market’s history.
As of the end of July 2020, the stock market continues to be volatile, rising and falling quickly. When stocks are hard to predict, investing becomes difficult.
Preserving wealth in a bear market
In a bear market, most investors try to lower the risk in their portfolio of investments. This is done by selling risky investments, buying safer investments, or not reinvesting at all.
Two common tactics for preserving wealth in a bear market are buying individual bonds or buying precious metals, such as gold.
Individual bonds have fixed rates and payments, so they are less affected by a bear market, which makes bonds relatively low-risk investments.
The value of precious metals usually doesn’t rise and fall as quickly as the stock market. And in the first half of 2020, precious metals have been decent investments, despite the COVID-19 pandemic.
If you’re looking for somewhere to put your money during the bear market we are currently experiencing, low-risk investments are recommended. But keep in mind that all investing comes with risk.
Careful investing requires time and research. Don’t forget to look before you leap!
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