Bear Market
A bear market is a decline of 20 percent or more in a broad market index from its recent peak. The 20 percent line is a convention rather than a law of nature, but it is the standard threshold separating a serious downturn from an ordinary pullback (a drop of 10 to 20 percent is called a correction).
The math
The recovery math is what investors underestimate. A 20 percent decline needs a 25 percent rebound to break even; a 50 percent decline needs 100 percent.
| Decline from peak | Rebound to break even |
|---|---|
| -20% | +25% |
| -40% | +67% |
| -50% | +100% |
But the same asymmetry powers the other direction: shares bought 40 percent below the peak double the eventual gain to the recovered price. The bear market that ruins the seller finances the buyer.
The trap
Acting on the label. By the time an index officially enters a bear market, a fifth of the decline has already happened, and much of the historical damage is behind rather than ahead.
Selling at the 20 percent line to “wait for clarity” has meant, in most past bear markets, selling closer to the bottom than the top, then missing the violent early rebound that delivers a large share of the recovery.
The move
Decide your bear market behavior before one arrives, in writing: what you buy, in what order, with what cash. For a stock picker, bear markets are the rare season when quality businesses trade at prices that make the next decade’s returns; a prepared watchlist with target prices converts panic into execution.
The edge is not predicting the bear, it is having a plan that assumes one.