Bull Markets vs Bear Markets

The 20% line, and why it is arbitrary

A bull market is a sustained rise in prices across a market; a bear market is a sustained fall. The convention that separates them is a 20% move from a peak or trough on a major index, measured on closing prices. There is nothing scientific about 20%. It is a round number that became a standard through repetition, and a 19.4% fall is not economically different from a 20.1% one.

What matters is not the label but the arithmetic underneath it, which is asymmetric in a way that most people have never worked through.

A 50% fall needs a 100% rise to get even

Losses and gains are not symmetric because they compound off different bases. Fall 50% and you are working from half the capital, so you need to double it to return to where you started.

The curve bends sharply past about a third. A portfolio down 20% needs an ordinary good year to recover. A portfolio down 50% needs a doubling, which historically has taken major indices years, and individual stocks sometimes never. This single table is the reason drawdown control matters more than entry timing, and you can run your own numbers through the drawdown calculator.

The asymmetry also explains why avoiding the deepest declines matters more than catching the best rises. A portfolio that returns 30%, then loses 30%, is down 9%, not flat. Repeat that pair five times and the account is down 37% while the arithmetic average return reads as zero. Volatility itself takes a toll on compounding, and the deeper the swings, the larger that toll becomes.

Bear market rallies and why they convince people

Declines do not go down in a straight line. Inside a large drawdown there are typically several sharp rallies of 10% to 20%, each accompanied by a plausible story about why the worst is over. They are violent precisely because positioning is bearish and any buying forces short covering.

This is the mechanism that does the most damage. An investor who sold near the lows buys back into the first convincing rally, then sells again when it fails, which converts one drawdown into three realised losses. Deciding in advance what would count as evidence of a turn, and writing it down before the rally arrives, is the only reliable defence, because the feeling of conviction during a bear rally is indistinguishable from the feeling during a real recovery.

Bull markets have their own version of this problem, which is less painful and more expensive. Long rises normalise the absence of drawdowns, so position sizes drift upward and leverage creeps in, because nothing has punished either for a long time. The risk taken at the top of a bull market is usually the largest any individual investor has ever carried, and it is carried at the point where it is least appropriate.