FinanceFirst financial glossary
What is Bear Market?
A direct definition, followed by examples, comparisons, related concepts, and the sources that support the explanation.
Written by Asim Ahmad, Founder and Editor, FinanceFirst
Definition
In one sentence about Bear Market
A bear market is defined as a decline of 20% or more in a broad market index (typically the S&P 500) from its most recent peak. Bear markets are a normal part of market cycles, occurring roughly once every 5-7 years on average. They are typically caused by economic recessions, financial crises, or major geopolitical events and historically last about 9-14 months before recovery begins.
Why Bear Markets Matter
Understanding bear markets is crucial because investor behavior during downturns often determines long-term investment success. According to research from Dalbar, the average equity fund investor underperforms the S&P 500 by approximately 3-4 percentage points annually, largely because they sell during bear markets and miss the recovery. Since 1928, the S&P 500 has experienced 27 bear markets, yet it has recovered from every single one and gone on to reach new all-time highs. Bear markets create buying opportunities for patient, disciplined investors. Stocks go on sale at discounted prices, and those who continue investing through downturns accumulate more shares at lower prices, which amplifies returns during the eventual recovery.
Real-World Example: Major Bear Markets in History
Here are the most significant bear markets since 1970 and how the market recovered afterward:
| Bear Market | Peak-to-Trough Decline | Duration (Months) | Time to Recover | S&P 500 Return 5 Years After Bottom |
|---|---|---|---|---|
| 1973-1974 Oil Crisis | -48.2% | 21 | 69 months | +62% |
| 2000-2002 Dot-Com Bust | -49.1% | 31 | 56 months | +101% |
| 2007-2009 Financial Crisis | -56.8% | 17 | 49 months | +178% |
| 2020 COVID-19 Crash | -33.9% | 1 | 5 months | +105%* |
Bear Market Metrics and Calculations
A bear market is measured from the most recent peak to the lowest point (trough). The decline percentage is calculated as: Decline = ((Trough Value - Peak Value) / Peak Value) x 100. To recover, the market must gain more than it lost in percentage terms. Here is why recoveries require larger gains:
| Portfolio Decline | Starting Value | Value at Bottom | Gain Needed to Recover | Required Percentage Gain |
|---|---|---|---|---|
| -10% | $100,000 | $90,000 | $10,000 | 11.1% |
| -20% | $100,000 | $80,000 | $20,000 | 25.0% |
| -30% | $100,000 | $70,000 | $30,000 | 42.9% |
| -50% | $100,000 | $50,000 | $50,000 | 100.0% |
What to Do During a Bear Market
Bear markets call for discipline and a clear strategy:
- Continue investing regularly: Dollar-cost averaging during a bear market lets you buy more shares at lower prices, boosting future returns when the market recovers
- Review your asset allocation: If the decline is causing severe anxiety, your portfolio may be too aggressive for your risk tolerance. Consider adjusting after the recovery
- Avoid panic selling: Selling during a bear market locks in losses and forces you to time the re-entry correctly, which research shows most investors fail to do
- Rebalance opportunistically: A bear market may shift your allocation. Rebalancing by buying stocks (now cheaper) and selling bonds (relatively stable) enforces buy-low discipline
- Tax-loss harvest in taxable accounts: Selling losing investments to offset gains reduces your tax bill while maintaining market exposure through similar funds
- Keep 6-12 months of expenses in cash: Having an adequate emergency fund prevents you from being forced to sell investments at depressed prices
Common Bear Market Mistakes
These errors cost investors significant wealth during downturns:
- Selling everything and moving to cash: Missing just the 10 best days in the S&P 500 over a 20-year span reduces annualized returns from 9.8% to 5.6% according to J.P. Morgan research. Many of the best days occur during or immediately after bear markets
- Waiting to invest until things feel safe: By the time the economy looks healthy again, markets have often already recovered 30-50% from their lows. The best time to invest is when fear is highest
- Checking your portfolio constantly: Frequent monitoring during bear markets increases emotional decision-making. Studies show investors who check less frequently earn higher returns
- Abandoning your investment plan: A well-constructed, diversified portfolio is designed to withstand bear markets. Changing strategies mid-downturn typically makes outcomes worse
Bear markets are temporary but inevitable. The S&P 500 has recovered from every bear market in history and gone on to new highs. The best strategy is to maintain your investment plan, continue contributing, and resist the urge to sell. If anything, bear markets are buying opportunities for investors with a long time horizon.
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Common questions
Frequently asked questions
How long do bear markets typically last?
The average bear market since 1928 has lasted about 9.6 months (under a year), with a median decline of about 33%. However, some have been as short as one month (COVID crash in 2020) and as long as 31 months (2000-2002 dot-com bust). The recovery period to reach the previous peak averages about 2 years.
Should I stop investing during a bear market?
No. Continuing to invest during a bear market is one of the most powerful wealth-building strategies. You are buying shares at discounted prices, which amplifies your returns during the recovery. Historical data consistently shows that investors who maintain regular contributions through bear markets significantly outperform those who stop and try to re-enter later.
Can I predict when a bear market will happen?
No one can consistently predict bear markets with accuracy. Many Wall Street strategists have predicted bear markets that never happened, and actual bear markets often arrive without widespread prediction. Rather than trying to time the market, maintain a diversified portfolio appropriate for your risk tolerance and time horizon.
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Sources and further reading
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