In the world of investment, the jargons ‘bull’, and ‘bear’ are normally used to describe market conditions. These terms illustrate how stock markets are doing in general—that is, whether they are growing (“bullish”) or declining (“bearish”) in worth. As an investor, your investment portfolio is greatly affected by the trend of the market. Therefore, it is critical to recognise how these market conditions may influence your investments.
For this article, we refer to the bull and bear of the US market since they have the most comprehensive data compared to others.
What is a bull market?
A bull market is characterised as a period when stock prices are growing, and the market outlook is positive. In general, a bull market ensues when there is an upsurge of 20% or more in a broad market index over at least a two-month period. Investors are likely to keep their money in the market, hoping to cash in on uprising stock prices, and possibly increase their stakes in the market to attempt to capitalize on these situations. Rising stocks during a bull market indicate a period of economic expansion, a solid economy, and investors feeling safe about the market.
What is a bear market?
A bear market occurs when stock prices are falling at least 20% over a two-month period with a negative market outlook in general. Bear markets may result from an economic downturn intensified by market bubbles bursting or geopolitical risks. Many investors attempt to cut their losses by selling their stocks/investments, leading to already crashing stock values in bear markets. These might be due to investors’ low confidence, and pessimism about the market direction. Eventually, investors begin to find stocks lucratively priced, and start buying, officially putting an end to the bear market, and entering the bull market.
History of Bull and Bear Markets Since 1926
Here, for example, is a chart supporting a brief history of the U.S. bull and bear markets since 1926. Bull market trend is highlighted in blue, while bear is in orange.
Referring to information analysed by First Trust Portfolios as in the graph above:
The average bull market period lasted 9.1 years with an average cumulative return of 476%.
The average bear market period lasted 1.4 years with an average cumulative loss of -41%.
What does this mean?
First, bull markets typically last LONGER than bear markets. Secondly, the market is proved to be growing steadily for the past 90+ years, with only rare minor speed bumps. THINK about real risk of missing out on future gain/huge growth – IF you stop investing or pulling money out when the market goes bearish.
What Smart Investors Do
Always have a clear investment purpose and goals – Big retirement nest in 20 years time? Education savings plans for your children? Why not? As proven in history, holding on to your investments for the long term is an almost warranted way to make money in the stock market. Smart investors will take that advantage as to get cheaper stocks price or attractive unit prices for unit trusts. This will help you to focus on the bigger picture.
Diversification – How can you do this? You can invest in various sectors that perform well during bear markets: Healthcare, utilities, oil and gas, and other essential sectors that are always in demand regardless of market conditions. This is what we called as defensive stocks.
Stay invested – Adding money regularly to the market allows you to continue investing money over time, and in roughly equal amounts. This is a strategy identified as dollar-cost averaging. This will ensure you not pouring all your money into a stock at its high, as it relieves your purchase price over time: and at the same time having a leverage of market dips. This type of investment can be done automatically via monthly autodebits.
Patience is key – Emotional turmoils can be daunting for investors in times of low confidence, and pessimism on market outlooks. However, it is not best to go to extremes for the answer. Do not sell unless you completely have to as you ride out the market dip, or conversely buy up anything you can at a lower price. Best investments may not be resistant to market declines. However, staying invested gives you a better edge to be part of their rebound as temporary declines are just that – temporary.
Always believe that time is on your side – The stock market will bounce back eventually, as again and again, history has shown that bull markets last longer than bear markets.
On a Final Note
Market courses are constantly fluctuating. Nevertheless, it is crucial to be focused, and stay consistent with your investment strategy. Understanding bear markets, and bull markets; along with working with a financial advisor can definitely help in keeping your emotions in check, and also formulating investing decisions that work for you.
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