In the financial world, you’ll often hear the terms “bull market” and “bear market” in reference to market conditions. These terms refer to extended periods of ups and downs in the financial markets. And because the market conditions directly affect your financial portfolios, it’s important to understand their differences.
Just like anything in life, ups and downs are unavoidable when it comes to the stock market. But understanding bull and bear markets and potentially maintaining or adjusting your investment strategy accordingly can put you on solid footing to weather the rollercoaster in the long run.
What Is a Bull Market?
A bull market is a period of time in the financial markets where asset prices are rising, and optimism is high. A bull market is seen as a good thing for most investors because stock prices are on the upswing and the economy is booming. In other words, the market is charging ahead, and portfolios are rising in value. The designation is a bit vague, as there’s no specific amount of time or level of increase that defines a bull market.
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Investing During a Bull Market
Investors choose to adopt different investment strategies depending on whether we’re experiencing a bull or bear market. During a bull market, some suggest holding off on the urge to sell stocks even after you’ve had gains since you could miss out on even higher prices if the bull market charges forward. However, no one knows when a peak will arrive, so this buy-and-hold strategy could backfire if the markets decline and investors don’t sell.
One thing to avoid during a bull market is getting too confident. Because investors have seen their holdings gaining value, they might think they’re better at picking stocks than they are and could feel tempted to make riskier moves.
Another common mistake is believing that the gains will continue; in reality, it’s often hard to predict a downswing, and stock market timing is challenging for even professional investors.
Investors’ decisions during a bull market also depend on their financial goals and risk tolerance.
What Is a Bear Market?
Investors and market watchers generally define a bear market as a drop of 20% or more from market highs. When investors refer to a bear market, it usually means that multiple broad market indexes, such as the Standard & Poors 500 Index (S&P 500) or Dow Jones Industrial Average (DJIA), fell by 20% or more over at least two months.
Why a Bear Market Can Be Unnerving
Just like encountering a grizzly on a hike, a bear market can be terrifying. Falling stock prices likely mean that the value of your retirement account or other investment portfolios are plummeting.
Unrealized losses during a bear market can be psychologically brutal, and if your investments don’t have time to recover, they can seriously affect your life.
However, bear markets are a fact of life; they occur every three to four years. The average bear market lasts about ten months, and stock prices decline roughly 36% during these downswings. In contrast, the average bull market lasts nearly three years, with stocks rising 114%.
But what makes them nerve-wracking is that it’s difficult to see them coming. Some signs that a bear market may be looming include a slowing economy, increasing unemployment, declining profits for corporations, and decreasing consumer confidence, among other things.
Investing During a Bear Market
A great way to prepare for a bear market is before it happens. One option could be to make sure your assets aren’t allocated in a way that’s riskier than you’re comfortable with — for example, by being overly invested in stocks in one company, industry, or region — when times are good.
Buying stock during a bear market can be advantageous since investors might be getting a better deal on stocks that could rise in value once the market recovers, also known as buying the dip. However, there can be danger in predicting when certain stocks will hit bottom and buying them with the expectation of future gains.
No one has a crystal ball, so there’s always a chance the price will keep plummeting. Another option might be to use dollar-cost averaging — investing a fixed amount of money over time — so that chances of buying at high or low points are spread out over time. Investing in companies with strong and dependable earnings can also be a potentially good idea since they’re more likely to weather the storm better than others.
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Once the bear market arrives, investors make a common mistake: getting spooked and selling off all their stocks. But selling when prices are low means they could be likely to suffer losses and may miss the subsequent rebound.
In general, as long as investors are comfortable with their portfolio mix and are investing for the long haul, dumping most stocks due to panic is unnecessary. It’s worth remembering that market cycles are normal, and the same dynamism responsible for downturns allows investors to experience gains at other times.
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The everyday investor probably shouldn’t worry too much about evaluating bull and bear markets and finding the perfect time to make trades to maximize gains and minimize losses. That active investing strategy could get you in trouble. If you’re investing for decades down the road, once you have an investment mix that is diversified and matches your comfort with risk, it’s often wisest to leave it alone regardless of what the market is doing.
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