Investment can be an intricate world full of choices, complexities, and unfamiliar jargon - one of which may be "bull" and "bear" markets.
Both terms refer to market trends that can have an effect on your investment strategy and portfolio direction, though their origin remains elusive; one theory suggests they originated with bull-and-bear fights held during Elizabethan England and gold rush era California.
Bear markets may seem counterintuitive to investors, but bear markets can actually be beneficial for them. By buying assets that have lost value during an unstable market, investors may gain exposure to assets at reduced prices that will give potential returns when markets recover. It is essential that investors remain strategic and employ caution during this period to prevent emotional investing decisions from leading them down a dangerous path of selling off assets too early at their lowest point. Financial advisors can assist with creating plans aligned with goals and time horizons so you can manage any downturns impacting on your portfolio investments.
Although its exact origins remain obscure, most agree that a bear market occurs when asset prices drop substantially over an extended period. A common definition is 20% or greater from peak to trough; however, bear markets can also refer to less severe pullbacks like corrections.
Bear markets typically correspond with rising interest rates, an economy deteriorating quickly, and investor pessimism. They can even occur during periods of economic expansion like 2008 - 2009's Great Recession; it is important to remember that bear markets do not necessarily signal recession and many downturns can be followed by rebound bull markets; historically there have been 27 bear markets but only 15 recessions since 1929.
A bull market refers to any period during which investment prices steadily increase in financial markets, typically public stocks but also real estate, agricultural commodities and cryptocurrencies. A bull market often signifies economic expansion as it features high consumer confidence levels, low unemployment rates, robust GDP growth rates and rising corporate profits.
The term "bull" probably derives from its association with an animal with pointed horns; such a symbolism often serves to illustrate rising equity prices that characterize bull markets.
Investor sentiment often dictates market movements and, by extension, economies. A bull run sees stock demand spike while positive media coverage often contributes to an increase in investor trust and ultimately more companies going public.
An emerging bull market can be an advantageous time to invest, but it's wise to remain aware of your overall financial position and investment goals. If your portfolio is used to fund retirement, rebalancing may help mitigate risk while staying on course with long-term goals.
Bear and bull markets differ in simple terms: bear markets occur when prices decline while bull markets see them increase. Investor confidence often takes a hit during bear markets as people hesitate whether or not now is an appropriate time to invest. Some may sell off holdings out of fear for further decline.
Bear markets typically emerge due to a combination of economic and geopolitical forces. These can include inflation, Federal Reserve rate increases to combat it, slow economic activity worldwide and war or political upheaval; or high unemployment and decreased gross domestic product.
Although investors can attempt to predict when a bear market will end, it can be challenging. Therefore, it is wise to continue with your investment plan by dollar cost averaging your portfolio into stocks or other holdings that you believe will recover in value over time.
As investors, it's crucial that they remember bear and bull markets are part of a normal long-term investing cycle. You will likely experience both in your lifetime, so having a diversified portfolio that can withstand bear markets is vital. Establishing savings goals and retirement strategies early can also help protect against potential dips in performance down the road.
When people use the word "bearish", they don't mean their stomach or their willingness to help Leonardo DiCaprio win an Oscar; rather, they are referring to their investment outlook. Although it might seem counterintuitive, being bearish on an index can cause it to decrease even when individual stocks report positive news and earnings growth.
To avoid being taken by surprise during a bear market, it is best to invest in investments that will withstand downturns well, such as pharmaceuticals, consumer staples and utilities. Defensive sectors tend to experience lower volatility than their more risky counterparts and outperform in times of economic instability. Bond investments also offer a relatively safe income source that should outshone stock market fluctuations; such debt obligations issued by companies, states, municipalities or national governments provide regular interest payments over an agreed-upon time.
Diversifying your portfolio with dividend-paying stocks or those known to increase dividends can be helpful when approaching retirement, particularly if working longer will enable you to save more and delay claiming Social Security as long as possible. Consult with your financial advisor in order to assess if you're adequately diversified and prepared for future market conditions.