What is the difference? – Councilor Forbes
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Move on, Scorpios and Capricorns. When it comes to the stock market, there are two best signs to consider: the bull and the bear. According to market “astrology”, a bear indicates the market is falling while a bull indicates the market is growing.
For better or for worse, both bull markets and bear markets are part of the stock market life cycle: you need to know bear market lows to reach bull market highs. You will be living your fair share of each, and knowing what to expect can help you better manage your investment decisions through them.
What is a bear market?
A bear market occurs when stock prices on major stock indexes, such as the S&P 500 or the Dow Jones Industrial Average, fall at least 20% from a recent high. This contrasts with a correction, which is a drop of at least 10% and tends to be much shorter. Corrections usually do not lead to full bear markets. But when they do, the bear market causes an average 32.5% drop from the most recent market peak.
A bear market is often caused by the downturn in the economy and rising unemployment rates. During this period, investors generally feel pessimistic about the outlook for the stock market, and stock market developments can be accompanied by a recession. But a bear market doesn’t always indicate that a recession is coming. In recent history, a recession has followed a bear market about 70% of the time.
During a bear market, many investors may want to sell their investments to protect their money, gain access to liquidity, or move their holdings to more conservative securities, which can have the unintended side effect of creating a sell-off, resulting in drop stock prices. even lower. It can also cause investors to sell their investments for less than what they paid, which can hamper their ability to meet their long-term financial goals.
While bear markets have become less common overall since WWII, they still occur about once every 5.4 years. In your lifetime, you can expect to cross around 14 bear markets.
How long does a bear market last?
Historically, bear markets tend to be shorter than bull markets. The average length of a bear market is only 289 days, or just under 10 months.
Some bear markets lasted for years, while others only lasted a few months. The longest bear market occurred from March 1937 to April 1942 – the Great Depression – and lasted for 61 months. Over the past few decades, however, bear markets have generally become shorter. In 1990, for example, a bear market lasted only three months.
Since World War II, it has taken about two years on average for the stock market to recover or hit its previous high. But it’s not always the case. The most recent bear market, which began in March 2020, was unusually short, ending in August when stocks closed at record highs. The previous bear market, the Great Recession, on the other hand, did not recover for about four years.
It is important to note, however, that even during bear markets, the stock market can register big gains. For example, over the past two decades, more than half of the strongest days in the S&P 500 have occurred during bear markets.
What is a bull market?
A bull market occurs when a major stock index rises by 20% or more from a recent low. With a bull market, stock prices rise steadily and investors are optimistic and encouraged about the future performance of the stock market.
Bull markets indicate that the economy is strong and unemployment rates are generally low, which can instill more confidence in investors and provide people with more income to invest. This can lead to massive growth: Stock prices rise 112% on average during bull markets.
How long does a bull market last?
Bull markets can last anywhere from a few months to several years, but they tend to be longer than bear markets. They also tend to be more common: bull markets have occurred for 78% of the past 91 years.
The average bull market lasts 973 days, or 2.7 years. The longest bull market lasted from 2009 to 2020 and saw stocks grow over 400%.
What should you do in a bull market versus a bear market?
While bull markets usually don’t cause too much stress, bear markets often inspire anxiety and uncertainty. However, how you should handle a bear market depends on your investment schedule.
If you are decades away from your goal
If you are in your 20s, 30s, or even 40s and investing for a distant goal like retirement, make an effort to hold onto your stocks and continue to invest regardless of the market. If you are investing in a diversified portfolio, you have designed your investment strategy and holdings with bulls and bear markets in mind.
While you may be tempted to sell your investments to avoid losing more money during a bear market, it blocks any losses you have incurred. You then have the difficult decision of when to re-enter the stock market.
Market timing is notoriously difficult, and you never know when the market is going to bottom. If you transfer your investments in cash for just a month while trying to determine if the market has bottomed out, you could reduce your ROIs by over 30% compared to someone who stays invested all the time. , according to research by Charles Schwab. .
Instead, view bear markets as opportunities: While you are young, a bear market gives you the opportunity to profit from declining stock prices before a rally occurs. And if you practice cost averaging in dollars – where you invest in a security at regular intervals, rather than a one-time lump sum – you reduce the risk of paying more than you would otherwise per share. In fact, you could end up paying less per share overall.
While you should try not to sell during a downturn, a bear market can also remind you to reconsider your investing strategy once the market recovers. Even if you know that a market recovery will occur, you may find that your willingness to take risks is less than you think.
If you are approaching your goal
If you are nearing the end of your investment calendar (i.e., you are a few years away from your target retirement date), you have less time to recover from the lows of the bear market. While we know that the market has historically recovered from every bear market, you may not have on average two years for your investments to return to their previous values.
This is why financial advisers recommend that you review your portfolio several times during your life in order to adjust your portfolio allocation and rebalance it as needed. This may mean buying or selling different securities to maintain an appropriate mix of stocks, bonds, and cash to meet your financial goals and tolerance for risk.
If you’re not sure how to rebalance your portfolio appropriately based on your timeline and willingness to take financial risks, check out our guide to saving for retirement here. You can also consult a financial advisor to make sure you have the right diversification and mix of investments.
If you are retired
Once they no longer have an active income stream, many people shift their investment strategies towards preservation instead of growth. This usually means making your investments more conservative, or based on cash, bonds, and fixed income, than before.
Actively withdrawing from a limited nest egg also introduces a new risk: during bear markets or times of high inflation, you withdraw more than you can afford and end up running out of money. Fortunately, you can combat this problem with a withdrawal rule called the 4% rule.
The 4% rule states that you can safely withdraw 4% from your retirement portfolio in the first year of your retirement. Then you can safely withdraw the same basic amount each year, adjusted for inflation, without running out of money for at least 30 years and in some cases up to 50. Notably, the research that established the 4% rule revealed this to be true thanks to both bullish and bearish markets.
That said, if you’re particularly concerned about stock returns in retirement, you might opt for a withdrawal of just 3% from your portfolio. A financial advisor or tax professional can help you determine the right withdrawal rate for your assets and your tolerance for risk.
Conclusion on investing in bearish and bullish markets
While bear markets can be scary, they are a natural part of the business cycle and often lead to even higher returns. A diversified portfolio built for your financial goals can prepare you to stay confidently on course and tackle any type of market.