The fall in the prices of stocks and the crypto markets over a prolonged period of time with losses of at least 20% is called a bear market (literally: bear market) or “bear market”. In English, bear refers to the bear, although this situation is not precisely typical of times that invite hugs. Worried about downtrends or even crypto winter and willing to consider hibernation until the bulls (bull markets) strike again? Take the time to learn some of the basics of bear markets and what to watch out for.

The use of the terms “bulls” and “bears” to describe sentiments in the stock markets dates back to the 17th century. Diamond trader Joseph de la Vega compared stock market events to the fighting behavior of two animals, a bull and a bear, in his famous work on stock markets, aptly named Confusion of Confusions.

De la Vega compared upward price movements and positive sentiment to a bull pushing its horns from the bottom up, and conversely, falling prices and bearish emotions to a bear pawing from the top down. . Let’s clear up some of the confusion surrounding bear markets while you and your assets await the next honeymoon phase.

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1. What goes up must come down

A bull market is similar to what you feel if you are having a good time at a party. You try not to think about the end, but somehow you realize in your heart that it will end and that the next morning will come at some point.

Although “bear markets” (bears) do not cause real hangovers and have historically tended to last less than “bull markets” (bulls), the former are still difficult to endure, even for the most “daring”, especially if You are a beginner in investing and this is your first bear market experience. You start to realize that investor sentiment is getting more negative (and it’s not going to go away) and that the assets in your portfolio are getting red hot.

How long does a bear market last? Although no one can say for sure, the average duration of a bear market is about ten months, while the longest known bull market lasted eleven years. This discrepancy could also be a reason to assume that bull markets are considered permanent in some way and we might be inclined to think that growth is unlimited, but it never is.

The magic words are: market cycle. A cycle is a sequence of events that repeats itself regularly; in our case, these events constitute approximately four phases that are similar to economic cycles, with evolutions going up and down again and again:

  • The expansion phase of a cycle brings with it growth and bull markets in which investors look to buy.
  • The peak phase is marked by buying pressure in maturing markets and then saturation occurs as investors stop buying assets at very high prices.
  • Peaks are followed by a plateau phase in which markets weaken and decline.
  • The sell-off phase means that the markets fall to their lowest possible level for some time before the cycle starts again with an expansion phase.
  • (No one knows how long that “some time” is)

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2. Know the most important signs

Inflation is a monetary phenomenon characterized by a process of sustained increase in the price levels of goods and services. In turn, this evolution means that you can buy fewer goods for the same amount of money as in an earlier era.

Although moderate increases in inflation are natural and help maintain purchasing power in the medium term, inflation becomes problematic when its evolution begins to accelerate and becomes increasingly uncertain, simultaneously increasing financial risk. Rising inflation is often an indicator of an impending rise in interest rates, causing market prices to decline and economic growth to slow.

Central banks try to curb inflation by raising key interest rates at some point while seeking to stabilize the economy without slowing it down too much. As rising interest rates also mean that borrowing money for investments and consumer spending through financial institutions becomes more expensive for consumers and businesses, an initial negative stock market reaction to such news is often almost immediate, while other economic indicators, such as employment rates, may take much longer to react. When interest rates fall, markets tend to trend higher, as this is often seen as a sign of economic growth.

Finally, geopolitical factors such as wars, the COVID-19 pandemic, the evolution of commodity prices or declines after bull markets can also contribute to the formation of a bear market.

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3. Smart bassists think of everything

What is the best way to prepare for a bear market? There are a number of precautions that investors can take to deal with bearish times. First of all, make sure you plan ahead for both the good times and the bad and learn the fundamentals of fundamental analysis and technical analysis of stocks before making any investment decisions.

The reason for investing in a variety of assets is to ensure a high level of portfolio diversification, as different types of assets have historically been affected by bear markets differently, especially when it comes to stocks. growth and value stocks. Try to think about the different scenarios that are possible for your different actions: how are the respective sectors affected by the different types of events and what are the inherent risks?

Practice reading trading charts, and become familiar with the most important candlesticks and trading indicators. Build your investment strategy well in advance of difficult times and plan how you will stick to it to avoid panic-selling and emotion-based selling.

Learn about exchange-traded funds (ETFs) and learn about bonds, high-dividend stock companies, and defensive stocks (for example, those companies that provide goods and services that are always needed by the public, regardless of market developments).

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4. Don’t bother the bear!

Once the bear market is here to stay for good, it is time to take some actions and avoid others. First of all, don’t get carried away by the excitement when you see prices drop, and don’t start selling your assets like crazy. Historically, bear market rallies have the potential to provide high returns, while selling assets out of emotional reaction can lock you into a losing spot forever.

Remember that you are investing and building your wealth for the long term (buy and own) and that the markets will eventually recover. If you want to turn the recession into an opportunity and take a proactive approach to the market situation, consider investing with Bitpanda Savings Plans to use cost averaging while actively following the evolution of the economy and exploring other opportunities for additional income. such as crypto asset staking or other options for experienced investors.

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5. Wait for the change of course

Although there are no sure signs that a bear market is coming to an end and you want to make sure you are not fooled by a bear market rally (temporary rally), there are signs to watch out for that indicate economic confidence and market cycles are booming. Track corporate earnings for your favorite stocks to see if they’re improving along with other companies and industries, and watch for other signs of a market turnaround, such as indicators of economic recovery and rising investor confidence.

Keep in mind at all times that it is up to you how you invest and what decisions you make: you should never invest more than you can afford to lose. Check the price trends of your favorite cryptocurrencies, stocks *, ETFs *, and precious metals in Bitpanda’s app for iOS and Android, and start your investment journey here.

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