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A bear market is a market in which stock and/or bond prices decline over an extended period of time, at times accompanied by an economic recession, rising inflation or rising interest rates.
Why does this matter?
Because market conditions can impact returns. A bear market in stocks may be coupled with economic downturn, while a bear market in bonds is generally linked to significant increases in interest rates. That said, a bear market—whether in stocks or in bonds—is part of the natural state of financial markets to fluctuate, with negative performance some years and positive performance other years. Furthermore, sometimes a bear market in bonds is associated with a bull market in stocks, and a strong bond market is associated with weaknesses in stocks.
What's an investor to do?
First, don't panic. If you're investing for the long term, your best move is often to stay the course, trusting in average annual historical returns—about 10% per year for stocks and 5-6% per year for bonds. Second, diversify. Maintaining a portfolio across a broad spectrum of asset classes—stocks, bonds, and other products—helps soften the blow of a bear market. Most important, don't try to time the market. Investors often jump ship just as a bear market is bottoming out or jump in as a bull market is peaking. Investing incrementally, in good times and bad, is a tried and true way of bearing up in a bear market.
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