What is Bear Market? Lessons from Bear Markets

Bear markets leave marks on charts and on investor behaviour. Over the last three decades the NIFTY 50 has endured multiple deep drawdowns – from the Asian Crisis to the COVID-19 crash – and each episode taught us different lessons. Investors must use these lessons to build more resilient portfolios.

Market cycles are measured from peak to trough, so a stock index officially reaches bear territory when the closing price drops at least 20% from its most recent high (whereas a correction is a drop of 10% – 19.9%). A new bull market begins when the closing price gains 20% from its low. A snapshot of the bear markets in the last 30 years and the movement of the Nifty 50 is given below.

The data shows us that the average decline across episodes is roughly 39%, with extremes near 60%. What we learn from this is that we should build portfolios’ assuming severe drawdowns are possible. Portfolios designed only for small corrections will be forced into bad decisions when markets fall sharply.

The data shows us that the time to trough ranges from 34 days to 996 days. COVID-19 compressed fear into 63 days. What that teaches us is that maintaining liquidity can help us avoid forced selling. While fast crashes punish leverage and illiquidity, slow declines test patience and conviction.

The data shows us that the days to recover to previous peaks vary widely – from 138 days to 773 days. The average recovery in the dataset is about 435 days. The key lesson to investor is that having a long-term horizon is important. Investors who sell in panic will lock in their losses and those who stay invested or add during troughs capture the recovery.

The data shows us that bear markets are triggered by different causes – regional crises, tech bubbles, liquidity squeezes, global financial contagion, commodity shocks, and pandemics. The deepest drawdowns often followed leverage, credit stress, or concentrated exposures. It is important to understand that sector concentration will magnify losses. Diversification across asset classes, with exposure to debt, gold, and alternative assets, will cushion idiosyncratic shocks.

The data shows us that timing the exact bottom is nearly impossible. Systematic Investment plans and rupee-cost averaging are the best strategies in any markets.

The data shows us that despite repeated bear markets, the NIFTY’s long-term trend has been upward. The recovery eventually restores and exceeds prior peaks. Over multi-decade horizons, staying invested and compounding returns outweighs short-term pain. Bear markets are part of the price of long-term equity returns.

 
The bear markets in the last 30 years have taught us that trying to predict markets is futile. Drawdowns are inevitable, their causes are varied, and their depths and durations unpredictable. Only disciplined planning, liquidity, diversification, and systematic investing, can turn volatility from a threat into an opportunity. Investors who learn these lessons will be better positioned to survive the next bear market and benefit from the recovery that follows.

Author: Shri Shashi Krishnan, Director – NISM