Bear market investing

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2. What is a bear market?

A bear market is another name for a lengthy downturn in share prices. Bears are investors who expect prices to fall. Bulls expect them to rise. When the pessimists have the upper hand, there are more sellers of shares than buyers, prices fall, and, if the fall is steep and long enough, you have a bear market.

But how steep does the decline have to be to qualify as a bear market? The usual answer is that there has to be a sustained fall in stock market indices of more than 20% from the recent high. Note the three parts of that definition:

1. 'sustained': which means that a general fall in prices that lasts for a few weeks doesn't count.
2. 'stock market indices': which means that sharp falls in individual stocks, or in particular sectors, doesn't constitute a bear market if other stocks/sectors are doing fine.
3. '20%': which means that smaller percentage falls don't officially count as bear markets.

To be pedantic, a 10% fall in two trading days may feel like a bear market to you, but technically, it isn't one. It's a correction. And if it takes the edge off a rampant bull market, then arguably it's a healthy development.

There is nothing healthy about a real bear market. They happen rarely. But when they do the sharpness of the decline, and its intractability, will come as a shock to investors of more recent vintage.

• 1932 bottom in US stocks: Dow down 89 per cent
• 1974 in UK stocks: down 50 per cent
• 1990 bottom in Japanese stocks: down 63 per cent

Source: The Bear Book, John Rothchild

If you remove the requirement for the fall in prices to be sustained, there have been many more bear markets. According to John Rothchild, an authority on the subject, 24, 25 or 26 in the last century. That's one every four years. Chances are, you're going to have to cope with at least 10 bear markets in a lifetime's investing.

1. A word on bears 2. What is a bear market? 3. Why do bear markets happen? 4. How to spot the appearance of a bear market 5. How bear markets end 6. Bear market investment options: timing the market 7. Bear market investment options: the asset classes 8. Stocks: blue chips vs small caps 9. Bonds 10. Property and gold 11. Cash 12. Stocks: general principles 13. Bear-proofing - low 'beta' stocks 14. Bear-proofing - high yield shares 15. Bear-proofing - sectors that historically do well in bear markets 16. Bear-proofing - sectors that historically do badly in bear markets 17. Bear-proofing - key ratios for selecting stocks 18. Bear-proofing - investing in stocks you know and can support 19. Bear-proofing - pound cost averaging 20. Recognising the revival - a check list 21. Conclusion

• The Bear Book
• Stan Weinstein's Secrets for Profiting in Bull and Bear Markets
• The Great Crash, 1929