What is a bear market and what does it mean for pensions, savings and interest rates?

You may be in trouble if your pension is tied to the stock market 

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The Independent Online

What is a bear market?

A bear market is defined as a long period of falling prices of securities, like stocks. Most people say one starts at with a downturn of 20 per cent over at least two months.

The name has nothing to do with actual bears. The finance world loves to give things silly names. So when markets are positive and prices are rising, this is called a bull market, but when sentiment turns negative, markets are described as bearish.

So it's like a correction?

Actually it's different from a correction. Corrections happen over shorter periods. They can actually be good for investors as some choose to take profit and others decide to buy shares.

A bear market is more difficult for investors. Once an index has fallen by 20 per cent, it's hard to say where it will stop.

Why is everyone talking about this?

Because the FTSE 100, which tracks the 100 biggest UK companies, entered a bear market on Wednesday. 

The FTSE hit a three-year low of 5,688.92 points, knocking 3.2 per cent off its value, or the equivalent of almost £50 billion. That's 20 per cent lower than its post-crisis peak of 7122, reached last April.

The FTSE 100 joins the French CAC, the German Dax and the Shanghai Composite in bear market territory. Japan also slipped into bear territory after the Nikkei closed down 3.7 per cent.

What does it mean for me?

You may be in trouble if you are one of the 5 million people whose pension is tied to the stock market.

The FTSE 100 has already dropped 500 points since the beginning of the year, which means that pension pot is shrinking. 

But it's unlikely your pension is entirely linked to stocks, as many pension funds spread out their investments over stocks, bonds, property and other securities.

You won't need reminding if you own any of the shares that have suffered. These include Shell and other oil-related companies. On Wednesday the sell-off was prompted by mining shares. HP Billiton stock was down 6.5 per cent, dragging Glencore, Anglo American, Rio Tinto and Antofagasta all down more than 2 per cent.

Tanking stock markets are just one of the reasons interest rates will likely stay on hold this year. Inflation is 0.2 per cent - way below the Bank of England's 2 per cent target. Plus the Chinese currency is depreciating, which makes Chinese exports cheaper and could depress the price of goods in the UK.

That's good news if you've borrowed a big mortgage to get on the property ladder, but not so good for savers.