Quite simply, in a bull market stock prices are generally rising and in a bear market, stock prices are generally falling. Markets are prone to cycles, where a bear market follows a bull market and vice versa.
In the late 1990s, investors rode an unprecedented bull market that continued for so long some analysts began to suggest the possibility that the long-running market cycle was dead. But such conclusions were premature, as the market’s downturn in the spring of 2000 proved.
The official definition of a bear market is a 20 percent drop from a market high. A steep market decline can thrust market indexes into a bear market overnight, while market rallies can quickly bring indexes back into bull territory. Bear markets are often slow, grinding declines over months or even years, not dramatic dips like the market crash of 1929. The bear market of 1973-74 left the S&P 500 down more than 50 percent in a nearly two-year period and it didn’t recover its pre-bear market value for almost a decade.
If you’re invested in stocks directly or through mutual funds, it’s very unlikely that your portfolio will survive a bear market unscathed. But remember that most cycles are just that, and the market inevitably will revert to a bull market someday. Because no one can say when, it is wisest to remain invested through all cycles.
One way to minimize the loss in value of your portfolio during a bear market is to have a diversified portfolio. By investing in different types of stock funds, you can protect your portfolio from the damage inflicted by a severe bear market in a particular market sector. Keep in mind that over a period of many years, the rise and fall of different market sectors usually offset each other, leading to an overall total return in your mutual fund portfolio.
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