The terms “bear” and “bull” are commonly used to describe the financial market, but how do they actually affect an investor’s portfolio? How should an investor react to these market shifts? Here are some general descriptions of these market movements and some common strategies for how to adjust for them.
“Bull” and “bear” markets are expressions of the stock market is doing in general, not the daily shifts and corrections. These terms actually describe the way that these animals attack their opponents, making it a little easier to remember the market trends that are occurring with each. A bull thrusts its horns up into the air, while a bear swipes its paws downward.
A bull market is a market movement that typically has a rise in value of at least 20%. Generally, the economy is doing well and unemployment is low. The share prices in a bull market are increasing and it is assumed that it will continue to do so for the foreseeable future. In a bull market investors want to buy in. They are looking to capitalize on a rising market, and therefore demand for securities is high, but supply is low.
Investor emotions, in addition to the state of the economy, impact the trends of the market. Emotional investor reactions actually fuel the long-term bull or bear market. The reaction to buy in when the market is high, and sell when the market is low, is the opposite of a rational reaction. A more sensible strategy is to buy when the market is low and sell when it is high.
Conversely, a bear market is used to describe a market in decline. The economy is potentially slowing down and share prices are dropping. Investors will again assume that the bear market will continue for the foreseeable future. Many will seek to sell stocks and not buy into a downward moving market. Emotional investors fuel the bear market as their low confidence causes them to keep their money out of the market, creating high supply and low demand.
How to React to a Bull or Bear Market
Because there is no definite way to predict market trends, it is important not to let the movements of the market cause emotional investing decisions. If possible, trust in the long-term and let the market work itself out. If, however, one desires to make small adjustments within a bull or bear market, there are some common suggestions for what to do.
In a bull market, or a market that is on the rise, it could be a good opportunity to take on more risk. Depending on the timing, if one can capitalize on the rising investments before they have reached their peak, then profit might be made. It is wise to remember, though, that no one can predict when the peak of the market will be. Investing in emerging economies or riskier sectors of the market may also be a worthwhile adjustment.
On the contrary, in a bear market with downward trends, it is sensible to stick with the tried and true investments. Bonds are an example of a “safe” investment to hold onto in a bear market, so an investor may want to adjust their portfolio to balance their losses with their gains.
As investors build their portfolios it is important to recognize the shifts of a bear and a bull market, but to resist the urge to respond with knee jerk reactions. Small adjustments are sensible and a strong investing strategy is made from understanding the shifts, choosing quality investments, and staying steady for the long-term. Remember, success in investing generally centers on a long-term approach.