The term 'bear markets' conjures anxiety and unease among investors. But, in between the headlines and beneath the market noise lies a nuanced reality: Bear markets are not unpredictable shocks—they are a natural consequence of excesses built up during prolonged bull runs. Understanding the nature of bear markets helps investors shift their perspective and enable them to navigate the market turmoil instead of fearing it.
In this read, we take a closer look at the characteristics of bear markets every investor should keep in mind:
- Bear markets are a part of the normal investment cycle. Investors who try to time the market may underperform in the long run.
- Economies, like markets, move in cycles. They will first exceed and then fall below their long-term trendlines; this is a necessary and natural component of a never-ending cycle, and stock prices will reflect these trends. It's the way things are, and as stock investors, we have to accept it.
- Asset allocation and diversification are foundational. Emotional discipline is equally crucial and helps investors stay the course.
- Bear markets often coincide with negative headlines. They typically emerge alongside tough economic times or weak earnings cycles, such as the one observed in the H1 of this FY. Unfortunately, financial media amplify while underreporting positive developments. For instance, in January 2025, India saw meaningful progress in PMI and a cooling of inflation close to the RBI’s 4% target. Yet, these green shoots received little attention.
- Bear markets create opportunities. The lower the cost of a long-term portfolio, the higher the long-term return. It's important to maintain emotional discipline and stick to financial goals.
- They occur more often than we think. 7 bear markets have occurred in the last 31 years— roughly once every 4.5 years.
- Volatility is the price that investors have to pay for premium returns. Bear markets are temporary setbacks in a long-term upward trend. They are the reason for equities' premium returns as higher relative long-term returns act as a compensation for tolerating higher uncertainty and volatility. The first one after liberalisation struck in 1993, when markets took a hit and dropped by 55%. However, 31 years on, they have soared 17x.
- A rational mindset is indispensable. Short-term volatility is a feature, not a flaw, of equity investing. Investors who can view bear markets as a ‘big sale’—where we get attractive prices on quality equities—are better positioned to take advantage of the opportunities they present.
Bear markets can be unsettling, but they are far from unusual. They offer long-term investors a dual opportunity: to avoid behavioural mistakes and to selectively invest in high-quality assets at discounted valuations. The key is to remain disciplined, stay diversified, focus on fundamentals, and align every decision with long-term financial goals.
