When you first hear the expression “Bull vs. Bear market,” it’s easy to think it has something to do with zoology, or a foreign delicacy sold in the open air. But these terms are related to something much less exotic: investing.
The animal metaphors help describe the general direction of the stock market over a given period. A bull market is seen as a good thing: It refers to a period when stock prices are on the upswing. In other words, the market is charging ahead. The designation is a bit vague, as there’s no specific amount of time or level of increase that defines a bull market.
So what is a bear market? It’s thought of as a negative for many stock market investors, and it has a more specific definition. This phrase refers to a period of time when the major indexes fall by 20% or more from their most recent peak and remains there for two months or longer.
Some define the recent high as one occurring within the last 52 weeks or the last two months. Generally a bear market is tied to a specific major index, such as the S&P 500 or Dow Jones, which represent broad US markets.
Don’t confuse a bear market with a correction , which refers to a 10% decline from a recent peak, or a dip, which is a fall of less than 10%. Bear markets typically precede recessions—which is a substantial decline in the economy that lasts at least a couple quarters—55% of the time, but not always.
Just like anything in life, ups and downs are unavoidable when it comes to the stock market. But understanding these terms and potentially adjusting your investment strategy accordingly can put you on solid footing to weather the rollercoaster in the long run.
Why the 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 you watch the value of your retirement account or other investment portfolios plummet.
The average bear market lasts nearly two years and sees stock prices decline by 41%.
Those losses can be psychologically brutal, and if your investments don’t have time to recover, they can have serious effects on your life.
Bear markets are a fact of life. They occur every three to four years, on average. In fact, there have been at least eight since 2006. But part of what makes them nerve-wracking is that it’s difficult to see them coming.
Some of the 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.
Another potential sign can be when the Federal Reserve raises interest rates after it has been reducing them.
The idea is that developments like these can cause investors to have negative expectations, driving them to sell and stock prices to fall. But these factors don’t necessarily mean a bear market will emerge. As the great economist Paul Samuelson once said, “the stock market has predicted nine out of the last five recessions.”
Investing During a Bull Market
Some people choose to adopt different investment strategies depending on whether we’re experiencing a bull market or a 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 (although of course, no one knows exactly when a peak will arrive).
If you think you’re in the tail end of a bull market, stocks that performed well in similar periods in the past, such as technology, industrial sectors, and energy, might be worth looking into.
When the economy is doing well, consumers typically have more money to spend, so investing in companies that sell furniture, cars, watches, or other discretionary items might seem more attractive.
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 actually 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 market timing is challenging for even professional investors.
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 actually 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 market timing is challenging for even professional investors.
Investing During a Bear Market
A great way to get ready 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 more risky 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. However, there can be danger in trying to predict when certain stocks will hit bottom and buying them then 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 vs. 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.
Once the bear market arrives, a common mistake investors make is 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 all their stocks due to panic is likely 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.
Investing Your Way
The everyday investor probably shouldn’t worry too much about evaluating the market and trying to find the perfect time to jump in. What’s more important than trying to predict overall returns is investing as early as possible. The more time money spends in the market, the more likely investors are to more comfortably weather short-term dips and take advantage of compounding returns.
And the more diverse an investor’s holdings, generally speaking, the less risk is taken on, since downturns that impact some assets don’t necessarily affect others.
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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