There are many options, complexities, and foreign terminologies in the world of investing. However, “bull market” and “bear market” may be more well-known to investors.
Although they are both used to describe how the markets are performing, they are very different concepts in how they might affect your portfolio and your investment choices. These terms explain the general state of the stock markets, including whether their value is increasing or decreasing.
Additionally, as an investor, the market’s direction is a powerful factor that significantly affects your portfolio. Determining how each of these market circumstances may affect your portfolio is crucial.
What Is A Bull Market?
Consumers’ confidence significantly influences the financial markets for stocks, bonds, and commodities.
Additionally, confidence soars during bull markets, which happen when investment prices increase for extended periods of time. Investors are willing to purchase or hold onto securities, producing a buyer’s market fueled by the strong economy and low unemployment that typically precede bull markets.
Beginning with the post-WW2 boom that outpaced the market’s high prior to the Great Depression, the bulls in US markets have had some impressive runs throughout history. Since then, the market has gone through a number of bull markets, the longest of which lasted from 2009 to 2019 and followed the collapse of the US housing market.
However, bull markets don’t last long.
What Is A Bear Market?
Bear markets, which happen when stock values fall by 20% or more over an extended period of time, are the exact opposite of bull markets in that they are driven by pessimism.
Bear markets sometimes occur during economic recession and high unemployment, whereas bull markets are typically driven by economic strength. Investors want to sell, usually running for the security of cash or fixed-income instruments instead of buying into the market. There is a seller’s market as a result.
These markets can exist for a short or long time. The Great Depression was the first and most well-known bear market. Other instances include the financial crisis in 2007-2008 and the Dot Com Bubble in 2000.
How To Invest in Bull and Bear Markets?
The way you make financial decisions differs substantially between bull and bear markets since they have many differences.
In a bull market, when there is more possibility for larger returns, it is ideal to have a bigger stock allocation. Buy stocks early and sell them before they reach their peak to benefit from a bull market’s growing values. Investment in stocks should be made with extreme caution in a bear market when there is a greater possibility for loss. It can be a good idea to put your money into fixed-income assets in case of a bear market.
Financial planning is another strategy to prepare for bull and bear markets. Making financial decisions based on emotion is one of the investors’ major pitfalls. Having a solid strategy in place with a financial advisor will help you avoid this pitfall.
For instance, during bull markets, you can have recency bias – the belief that the market will keep rising and be tempted to take greater risks than you should. On the other hand, in a bear market, you can behave out of fear and make snap judgments, like exiting the market.
Bull VS. Bear Market
The movement of prices and the overall performance or health of the market are what distinguish a bear market from a bull market.
Simply put, a market is considered a bull market when prices are rising and a bear market when prices are falling. To separate the two, keep in mind that although bears are renowned for hibernating, bulls are known for being active and charging ahead, like the prices in a rising market.
The Great Recession that followed the 2008 financial crisis and the Great Depression, which approximately started with the 1929 stock market crash, are two extreme examples of bear markets. The post-WW2 economic boom, on the other hand, is seen as an illustration of a bull market. There are a lot more examples. That’s because the market is often classified as either one or the other at any time, indicating that they alternate due to a continuous cycle.
Because there are several ways for stock investors to try to profit from both increases and decreases in stock prices, just because it is a bear market does not imply there aren’t many transactions taking place.
Takeaways
- Bull and Bear markets are used to describe how the market is performing.
- Bull markets happen when investment prices increase for extended periods of time.
- Bear markets happen when stock values fall by 20% or more over an extended period of time.
- The movement of prices and the overall performance or health of the market are what distinguish a bear market from a bull market.
