Making of a bear market
Many people are not clear about the effect a bear market can have on their investments. Every individual investor needs to be aware of the position and impact of a bear market so that he can take necessary action. The position of the market will also determine the purchase decisions along with the spread of investments over a period of time.
In technical terms a bear market happens when the market declines 20 per cent or more from the peak that was reached at a certain point of time. The fact that there is a peak reached will be known only when the market starts declining. The peak is always considered in hindsight.
The investor has to be aware of various declines because there can be sharp falls, but they need not be a bear market each time. There has to be some careful attention paid to the kind of decline because sharp rallies are often followed by some pullback but then over a period of time the market again heads higher.
There is nothing that is sacrosanct about a bear market because there can be times when figure slips below the 20 per cent mark and then heads higher.
This happens when the crossing is just for a small margin. But over a period of time when the break down is significant, then it can be said that there has been a confirmed entry in to the bear market. Once this happens there is further fall in shares prices and investors are should be cautious in their purchases in such a position.
Such a move, with the expectation that there will be a further fall, can lead to a position where the investor can sell some of their holdings that they might want to buy back or buy something later.
Similar to setting in of bear market, end of bear market also realised on hindsight. This is because the bottom gets decided only when the prices start going up from that level. It makes sense for an investor to buy when things are in a tough spot because then they can get good deals. It is not always possible to get the bottom but the investor can at least ensure that they get a good price for their purchases that yield returns later on.