5 Common Bear Market Myths

Posted on Thu 2nd Apr, 2009 12:56:17 PM

The term “bear market” has been used for over 100 years to describe a market where prices fall and pessimism rises. More recently the standard definition of a bear market has become an overall market that loses 20% of its value. Bear markets are bound to occur at some point, because as J.P. Morgan said investment prices are bound to fluctuate over time.

5 Myths of a Bear Market

There are no rallies- This is completely wrong. In fact during bear markets there are often very strong rallies, but the difference from a bull market rally is these rallies are typically very short-lived. Bear market rallies are extremely frequent and an investor who is counting on a bear market to go straight down in price is doing themselves a major disservice.
The economy is always in shambles- In fairness, this is sometimes the case, but it doesn’t have to be. The fact is there are numerous times where the market has gone into a prolonged bear market simply because growth in the economy has slowed or because valuations have become far too high. The economic picture doesn’t have to be terrible for a bear market to take place.
Capitulation occurs constantly- Capitulation is defined as the surrendering or giving up of investors who have hopes that the market will go up. In a bear market you will often see capitulation at some point, but capitulation isn’t something that will occur over a long period of time or consistently. If you think a bear market only occurs when capitulation occurs you are sadly mistaken.
Bear markets hit stocks quickly- This is not always the case. There are many long and drawn out bear markets where investors don’t realize they are in a bear market until after the fact, because things have slowly churned their way lower and the panic button hasn’t been pushed by the overall market.
You will know when a bear market ends- This is probably the single myth that hurts the individual investor more often than any of the others. At the end of a bear market there is no gong that goes off to let you know that the bear market has ended. Typically it takes quite a long time before investors truly realize the bear market ends. Don’t expect to know that the bear market is ending when it happens.

A bear market is tough to take no matter how much knowledge of it you have, but those who are armed with the knowledge of how a typical bear market works are certainly a step ahead of the rest. Understanding the most common myths of a bear market can help an investor avoid the mistakes that so many others make on a daily basis.

Aaron K. Smith is a freelance writer with experience working in the mutual fund industry and writing about investing and the stock market. View all posts by Aaron.

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