10 Bear Market Truths

A few truths about bear markets in stocks:

1. They happen. Sometimes stocks go down. That’s why they’re called risk assets. Half of all years since 1950 have seen a double-digit correction in stocks. Get used to it.

2.  They’re a natural outcome of a complex system run by emotions and divergent opinions. Humans tend to take things too far, so losses are inevitable.

3. Everyone says they’re healthy until they actually happen. Then they’re scary and investors who were looking for a better entry point begin to panic.

4. The majority of the people who have been scaring investors by predicting a bear market every single month for the past seven years will be the last ones to put their money to work when one actually hits.

5. It’s an arbitrary number. I have no idea why everyone decided that a 20% loss constitutes a bear market. The media will pay a lot of attention to this definition while it doesn’t matter at all to investors. The 1990s saw zero 20% corrections but two 19% drawdowns. Stocks also lost 19% in 2011. Does that extra 1% really matter?

6. Buy and hold feels great during a long bull market. It only works as a strategy if you continue to buy and hold when stocks fall. Both are much easier to do when stocks rise.

7. Your favorite pundit isn’t going to be able to help you make it through the next one. Perspective and context can help, but there’s nothing that can prepare an investor for the gut-punch you feel when seeing a chunk of your portfolio fall in value.

8. History is a broad outline of what can happen in the markets, not what will happen. Every cycle is different.

9. They’re very difficult to predict. All of the valuations, fundamentals, technicals and sentiment data in the world won’t help you predict when or why investors decide it’s time to panic.

10. These are the times that successful investors separate themselves from the pack. Most investors mistakenly assume that you make all of your money during bull markets. The reason so many investors fail is because they make poor decisions when markets fall.

Further Reading:
Crash Rules Everything Around Me

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  • spazaru

    Brilliant. I wish I had been reading you, Morgan Housel and Josh Brown during the 2008-2009 meltdown. I’d be in way better shape today. I’m not making the same mistake next bear market. I’m just not. Easy to say and hard to do, but I’m doing it thanks to y’all.

    • Ben

      Thank you. Glad you are finding this all helpful.

  • MikeSchoenberg

    any one doing covered calls

    • Whitey Joe Young

      You should have sold in December. Say hello to 20% losses. Covered calls gonna help THAT?

      • John Richards

        If you are in EM, you are way past 20%. If the S&P, I doubt it will go that far, The US is a lot stronger than people realize, for all the problems we can poke at. And if I’m wrong about the S&P, well, that just means that stocks will be on sale.

        I think every point down is just going to fuel future returns. With energy and commodity prices so low, Inflation seems likely to remain at bay far longer than the FED foresees, and it also seems likely we’ll be seeing historic profit margins within a few years. If you hold a balanced portfolio of stocks and bonds, and have an investment horizon of 5 years or more, I think you’ll be happy you didn’t sell.

  • Whitey Joe Young

    “All of the valuations, fundamentals, technicals and sentiment data in the world won’t help you predict when or why investors decide it’s time to panic.”

    What a bunch of horse****! The valuations, fundamentals, technicals, and sentiment data have all been SCREAMING “a bear market is very likely imminent”. You can’t predict when the spring will pop, but you can see it being wound tighter and tighter if you care to look. Market-cap to GDP, the drying up of leveraged loans, the widening spreads in the high-yield markets, the topping and then downturning trend of the charts, the worsening market internals with more and more issues trading DOWN while the indexes go UP…. you would have to be blind as a bat to not know something was about to go pop. Not this day, not this week, or month, but quite soon (in market history terms).

    • slotowner

      So imminent & soon means in the next decade? Did you short Shanghai on 12/30 knowing that China has all the signs of a bubble? Schiller has been repeating the same arguments for two decades now & some of the time he’s been right but most of the time because the markets have ignored his theory & data and grew.
      What one person would call tinder for the the next inferno other would call a wall of worry that a bull overcomes. Tinder can exist for a long time w/o a flash fire because it still requires that spark that causes a panic.

      We’ll see in 2026 if Whitey Joe Young is in the new for his exceptional market predictions.

  • Jerry

    11. Everyone who’s been calling for a bear market since 2010 will be on CNBC bragging that they called the bear market.

    • Ben

      Yes, plenty of uncalled for victory laps as always.

  • Charlie Davis

    A bear market is really a psychological phenomenon that progresses in stages. The news media likes the -20% rule because it;s objective.

    • Ben

      That’s fair. Still could use some context when things like oil are down 60% and then bounce off the bottom so their in a cyclical bull w/in a secular bear.

  • Amina Ado

    Great reminder. The Buffet biography, “the making of an American capitalist” really helped me see more clearly what was happening in 2008/2009. I was just about to fall for number 3 and then read your piece. Thanks.

  • Jim Willis

    Good stuff, Ben. Also, markets go down a lot faster than they go up, which is why roller coasters seem so scary.

    • Ben

      Yup the old saying is we take the escalator up and the elevator down.

  • Jim Clark

    Was mich nicht umbringt, macht mich stärker.

    • Ben


      • PinchThePennies

        What doesn’t kill me makes me stronger.

        • Jim Clark

          That is correct. From Friedrich Nietzsche “Twilight of the Idols”.