Recently, I’ve noticed that many novice investors still have a somewhat unclear understanding of bear markets, so I’d like to share my own perspective.

What exactly does a bear market mean? Simply put, it refers to a situation where asset prices fall more than 20% from their highs—this is called entering a bear market. Conversely, an increase of more than 20% from the lows is a bull market. This applies not only to stocks, but also to bonds, real estate, precious metals, and cryptocurrencies.

I’ve noticed that many people tend to confuse bear markets with market corrections. In fact, a market correction is only a decline of 10% to 20%, and it usually passes quickly. But a bear market is different: it’s a sustained, systemic decline that lasts for months or even years, with a far greater impact on both psychology and asset allocation.

The characteristics of a bear market are actually quite clear. First, stock prices drop sharply straight down from their highs. According to data from the U.S. Securities and Exchange Commission, when most stock indices fall by 20% or more within two months, it’s considered a bear market. Historically, over the past 140 years, the S&P 500 has gone through 19 bear markets, with an average decline of 37.3% and an average duration of about 289 days. The shortest one was the COVID-19 bear market in 2020—it only lasted one month before rebounding.

Bear markets are usually not triggered by a single factor. Once market confidence collapses, consumers hold back, companies stop hiring, capital markets become pessimistic about the outlook, and investors start selling. Another situation is when asset bubbles become too inflated—when prices are pushed so high that no one dares to step in as the buyer, a stampede can occur, and the decline accelerates. External shocks such as financial crises, geopolitical conflicts, central bank rate hikes, and pandemics can all spark bear markets.

Looking back at several major bear markets in the U.S. in modern times, the one in 2022 left the deepest impression. After the pandemic, global central banks flooded markets with liquidity, causing inflation to surge. At the same time, the Russia-Ukraine war pushed energy prices higher just as those developments were unfolding. The Federal Reserve was forced to raise interest rates significantly and reduce its balance sheet, and market confidence unraveled overnight. Although the 2020 pandemic bear market was short-lived, by then global markets had absorbed the lessons of 2008 and moved quickly with QE to stabilize cash flow—resulting instead in a two-year super bull market.

The 2008 financial crisis was the worst. Starting in October 2007, the Dow Jones fell from 14164 points to 6544 points, a decline of 53.4%. It didn’t return to the 2007 highs until 2013—so the entire recovery period lasted more than 5 years. Going back further, the 2000 dot-com bubble, Black Monday in 1987, and the 1973 oil crisis—each time—left a lasting lesson for the market.

What should you do in a bear market? Based on my experience: first, keep enough cash, reduce leverage, and avoid getting blown up by volatility. Second, stay away from stocks that people hype beyond reason—these tend to rally aggressively in bull markets, but they drop even more sharply in bear markets. You can focus on some defensive targets, such as sectors like healthcare that tend to be relatively resilient.

If you see high-quality stocks fall significantly, you can buy in batches, but you must confirm that the company has enough competitive advantages to get through it. If you’re really not sure about individual stocks, you can simply invest in broad market ETFs or other instruments tied to economic recovery. There are also opportunities in bear markets—if you want to short, you can consider derivatives like CFD, but you need to do solid risk management.

There’s another pitfall to avoid, called a bear market rebound or a bear market trap. This is when, during a downward trend, the market suddenly rebounds for a few days or even a few weeks, which can easily make people mistakenly think a bull market has arrived. Usually, you only truly leave a bear market after a continuous rise of more than 20%; otherwise, it’s still just a rebound.

In the end, a bear market isn’t something to be afraid of. The key is mindset and execution. With patience, strict stop-loss and take-profit discipline, and choosing the right tools, you can profit in both rising and falling markets. For prudent investors, bear markets are a time when challenges and opportunities coexist.