Bull vs. bear markets: What they are and how to invest during them
Jamie joined Citizens Wealth Management in 2022 and is in charge of managing and curating the investment product suite, which includes mutual funds and exchange-traded funds (ETFs), as well as portfolio models built using these products. He has over 30 years of expertise in the financial markets as a strategic partner, specializing in a wide range of fixed income and public and private equity products.
allocations of assets. ratios of expenses. profits per share. Let’s be honest: the world of investing is full of options, complications, and technical terms. Bull markets and bear markets, on the other hand, are two investment terms that might be more well-known. When it comes to how they can affect your portfolio and your investment choices, they are quite different animals, even if they both explain how markets are doing.
What is a bull market?
Consumer confidence has a significant impact on the financial markets for stocks, bonds, and commodities. Additionally, confidence is skyrocketing during bull markets, which happen when investment prices are rising steadily. When stock prices have increased by 20% or more from the last low over an extended period of time, it is considered a bull market.
Investors are keen to purchase or hang onto stocks due to the strong economies and low unemployment that typically precede bull markets.
Bull markets in the United States have had some incredible runs throughout history, beginning with the post-World War II boom that surpassed the market’s peak prior to the Great Depression. Since then, the market has had several bull markets, the longest of which lasted from 2009 to 2019 and followed the collapse of the US housing market.
Bulls, however, don’t run forever, as history has demonstrated.
What is a bear market?
Bear markets, which happen when stock values drop by 20% or more over an extended period of time, are the exact opposite of bull markets, which are driven by optimism. While bear markets frequently happen at times of economic downturn and increased unemployment, bull markets are typically driven by economic strength. Investors prefer to sell rather than participate in the market, frequently escaping for the security of cash or fixed-income instruments.
The duration of a bear market can range from a few weeks to several years. The Great Depression was the first and most well-known bear market. Other instances include the 2000 dot-com boom and the 2007–2008 housing crisis.
What do the bull and bear reference?
These words were first used by investors in the 1700s. The origins of these names are the subject of several theories. A charging bull conveys confidence. When a bull charges, it also raises its horns to align with the rising trendline of an expanding financial market.
Another notion is that when a bear hibernates, it symbolizes a market that is no longer active and has lost its motivation.
There is a well-known charging bull statue in lower Manhattan’s financial area since these pictures have become so iconic.
Investor mindsets in bull vs. bear markets
Investing may be very sentimental. This occurs in both bull and bear markets. Investors may have excitement and confidence during a bull market. More people are urged to purchase and sustain the rally as asset prices rise and yield gains. Bull markets typically occur when the economy is doing well, which makes investors feel better about their financial circumstances and give them more money to invest.
But during bull markets, investors run the genuine risk of being overconfident and taking on excessive risk—a condition called as irrational exuberance. Fear of missing out can lead people to make risky investments without doing their homework, as demonstrated by the rise of meme stocks during the 2021 pandemic bull market.
In bear markets, the opposite occurs. When their portfolios and net worth plummet, investors frequently become irate. For security, some choose to sell everything and cash out. Bear markets typically occur when the economy is having difficulties, which makes investors fearful and uneasy about their personal life, which influences their investing choices. Emotions influence investor attitudes in both situations, driving bear markets lower and bull markets upward.
How to invest in bull or bear markets
Financial planning is the most effective strategy to get ready for both bull and bear markets. Working with a financial advisor to develop a strong plan will help you avoid two of the most common mistakes made by investors: trying to time market fluctuations and making financial decisions based on emotion. For instance, you can be inclined to take on more risk than is wise during bull markets due to recency bias, which is the belief that the market will keep rising. On the other hand, in a down market, you can behave out of panic and make snap judgments, like pulling out of the market.
Navigating the market waves
It’s crucial to comprehend the market’s direction, but it’s quite challenging to forecast when a bull market will turn into a bear market.
Strategic asset allocation and a diversified portfolio have proven to be the most effective long-term methods for handling market fluctuations. The stock market has traditionally generated a high average return over time, despite its cyclical nature. Developing a diverse investment portfolio that can withstand difficult market conditions can be facilitated by working with a financial advisor.
Are you looking for additional guidance on portfolio preparation? Speak with a Citizens Wealth Advisor* right now for a customized strategy based on your objectives.