Investing Terms Simplified: Bear Market and Bull Market
You’ve heard the terrors of the bear market and the debate of whether we’re currently in a bull or bear market, but what exactly does each mean? A bear market is when stock prices fall in a short amount of time, and investor confidence is exceptionally low. Normally, it is defined by a 20% or more decline in stock prices. This is typically caused by a weakening economy due to unemployment, low business profits, and sometimes government interferences.
A bull market is just the opposite. This is described as a 20% or more increase in stock prices in a short period of time. Bull markets last about 4.5 years on
average—though we’ve been in a bull market we’re for roughly 10 years. The dates of a bull or bear market can only be known in retrospect and they will always
follow one another like a cycle. Common signs of a possible bull market are low unemployment rate, prices going up, and investor confidence.
What Causes a Bear Market
A bear market can be a scary thing—especially for those who only hear how it’ll cause mass loss. Understanding what causes a bear market can help you work through the next one—and there will be a next one because the stock market goes through the inevitable cycle of bear and bull markets.
When the economy goes into a recession, or stops growing and begins shrinking, the unemployment rate and inflation begin to rise. Normally, the stock prices decrease dramatically because of the bad economy.
This can cause investors to lose confidence in the stock market and slow or stop investing. The cycle persists as the stock prices continue to fall and scare more and more investors away until it’s a full-blown crisis—or so you’ve been taught. In the right situation, a bear market can be useful to some.
Why You Shouldn’t Fear a Bear Market
For one, it is a natural cycle that has always occurred, and the economy has always recovered. During a bear market, many people shy away from investing, but with careful consideration, it can be a great time to buy stocks at a low price! Take age, investment amount, and years to retirement into account when buying during a bear market.
If you already have a well-built portfolio, there are ways to plan for a bear market. For instance, adjusting the allocation amounts can prepare for minimal loss. Take age and retirement year into account when adjusting. Investors who are closer to retirement should reevaluate their investments leading up to a bear market in order to ensure zero to minimal loss.
Since no one can predict a bear market, preparing and considering change in your portfolio can be the best way to protect your assets.
How to Invest in a Bear Market
Consider dollar-cost averaging. In order to do this, you’ll put a fixed amount into an investment, typically a stock, on a regular basis. This can ensure that you aren’t purchasing the said stock at a high amount but still actively investing for the future.
Another option is diversifying your portfolio. Including different assets such as bonds, stocks, and index funds can help reduce any losses and maximize profit during a bear market. Since we cannot predict what will fall harder, having a diverse portfolio can ensure that the risk of loss is at a minimum because not every company performs the same.
Investing may be confusing and downright impossible at times. Couple with the risk of a bear market and many may shy away from serious investing. Here at RGA, we always encourage investing to fit your needs, risk comfort, and lifestyle by presenting and implementing multiple strategies for investing in any market. We constantly stay on top of financial news and prepare our clients for a bear market by presenting multiple solutions.
To learn more about investing and gaining in a bear market call us at 973.917.4556
to schedule your complimentary consultation!