Bear Markets

What is a bear market and what causes it?

By definition, a bear market is when the stock market falls for a prolonged period of time, usually by twenty percent or more. It is the opposite of a bull market.
This sharp decline in stock prices is normally due to a decrease in corporate profits, or a correction of overvaluation (i.e., stocks were too expensive and fell to more reasonable levels). Investors who are scared by these lower earnings or lofty valuations sell their stock, causing the price to drop. This causes other investors to worry about losing the money they've invested, so they sell as well; the vicious cycle begins.

One of the best examples of a prolonged bear market is that of 1996's when stocks went sideways for well over a decade. Experiences such as these are generally what scare would-be investors away from investing. Ironically, this keeps the bear market alive; because no few buyers are purchasing investments, the selling continues.

How does a bear market affect my investments?

Generally, a bear market will cause the securities you already own to drop in price. The decline in their value may be sudden, or it may be prolonged over the course of time, but the end result is the same: the quoted value of your holdings is lower. This leads to two fundamental principles:
1.) A bear market is only bad if you plan on selling your stock or need your money immediately.

2.) Falling stock prices and depressed markets are the friend of the long-term, value investor.

In other words, if you invest with the intent to hold your investments for decades, a bear market is a great opportunity to buy. It always amazes me that the "experts" advocate selling after the market has fallen. The time to sell was before your stocks lost value. If they know everything about your money, why they didn't warn you the crash was coming in the first place?