If you’ve been following financial news at all lately, you may have heard that we’ve entered into a bear market for stocks in the US. If you’ve been wondering what exactly that means and how it applies to you, you aren’t alone.
In this blog post, I’m going to spell out all of the important things to know when it comes to bear markets and bull markets.
What is a Bear Market?
A bear market occurs when stock prices fall by at least 20% from a recent high. This refers to stock prices for major market indexes, like the Dow Jones industrial average (DJIA) or S&P 500. This differs from a market correction, which is a shorter-lived decline of at least 10%. Market corrections don’t usually lead to full bear markets.
The bear has been used to represent a market slump because a bear’s hibernation can be likened to a market that has stalled.
A bear market is often precipitated by rising unemployment rates and a slowing economy. Bear markets generally include rising interest rates. Investors become generally weary and want to sell, often seeking to instead to invest in cash or fixed-income securities. A bear market doesn’t necessarily mean that a recession is coming, but a recession has followed a bear market about 70% of the time in recent history.
The amount of time that a bear market can last varies from a few weeks to several years. The Great Depression was the first and most notable bear market. Other recent examples include the housing crisis of 2007-2008 and the dot com bubble in 2000.
What is a Bull Market?
A bull market is the opposite of a bear market. It occurs when a major stock market index rises at least 20% from a recent low. Stock prices steadily increase and investors are generally optimistic about the upcoming market performance.
The bull has been used to represent a surging market because bulls charge, which is not unlike a market that is on the rise.
Bull markets are generally influenced by low unemployment rates and an optimistic, thriving economy. Investors become eager to invest or hold onto securities. Bull markets generally include lower interest rates.
There have been many bull market runs throughout history since the boom after World War II. The longest bull market run was from 2009 to 2019, just after the US housing market collapse.
What to Do in Each Market
In a bear market, investors may be tempted to sell their investments to keep from losing even more money. Alternatively, investors in a bull market may sell some of their investments to reap profits or hold onto them with hopes that future prices will rise even more.
If you are retired or nearing retirement, hopefully you have been watching your portfolio and have shifted towards safer, less volatile investments. If you haven’t, you may need to make some adjustments to your portfolio mix to keep from losing too much of your nest egg.
If you aren’t nearing retirement, most experts generally suggest not selling your investments off in a bear market. It’s probably best to avoid a knee-jerk reaction and leave them alone for the long haul. Historically, when investing for the long-term, even after taking into account all of the market fluctuations, the return on investments has generally grown positively.
If you have some extra cash handy and are in a financial position where you can make additional investments during a bear market, it could be a great time to take advantage of low market prices to grow your portfolio. When the market turns around, the return on your investments would generally be on the rise.
Generally, the longer you have until retirement when you start investing, the better, thanks to the magic of compounding. The sooner you invest and the more you are able to invest can lead to favorable portfolio growth. If you’d like to learn more about compounding when it comes to investing, check out my related blog post: How Does Compounding Affect My Investments?
The Bottom Line on Investing in Bear and Bull Markets
Bear markets can seem scary to some, but they are a natural part of the cyclical economic highs and lows. Bear markets often fuel even stronger returns in the time periods that follow them.
Make sure you consult your financial advisor to make sure you have the appropriate investment portfolio mix for your retirement goals. The last thing you want to do is be caught off guard with riskier investments heading into your golden years.
How are you feeling about this most recent bear market?
Check out some of my other posts on saving, making, and investing money:
- 6 Steps to Financial Planning for Beginners
- 7 Ways to Make Money Online Fast
- Why Should I Invest in an IRA?
- 7 Types of Inflation Resistant Investments
- 7 Habits of Successful People Who Are Never Broke
- 5 Money Habits to Boost Your Financial Wealth
- 7 Top Financial Mistakes and How to Avoid Them
- Stop Spending and Start Saving $1,000 With a 90 Day Saving Money Challenge
- How to Save $1,000 for an Emergency Fund in 90 Days or Less
- 7 Steps to Create a Personal Budget
Disclaimer: This information is intended for educational purposes and is not tailored for the needs of any specific investor. It is important to conduct your own analysis and research before making any investment. It is recommended to independently research and verify or seek financial advice from a professional in connection with any information on this website before using it to make an investment decision or otherwise.