Why might investors be cautious during a bear market?

Investors tend to be cautious during a bear market primarily because historical data shows that losses are common in such periods. A bear market is characterized by a decline in stock prices of 20% or more from recent highs, which often leads to widespread negative sentiment among investors. This historical context informs investor behavior, as they remember past downturns and the potential for significant losses. Consequently, in a bear market, many investors may choose to sell off their holdings to avoid further losses, leading them to adopt a more conservative approach or to hold onto cash instead of investing in declining assets.

The other options highlight conditions that are typically not associated with a bear market—such as rising stock prices, market optimism, and plentiful investment opportunities—which would typically lead to greater investor confidence and a more aggressive investment strategy. However, in a bear market, the reality of declining prices and potential further losses creates a climate of caution.