In the world of investing, the bull and bear are not animals you’d see in the wild. Instead, they represent sentiment about the economy, companies’ performance, and the prospect of investment returns. Usually, the terms tend to kick in when investment prices rise or fall by 20 per cent or more.
Since investment markets are complex and ever-changing, knowing what to expect from different market cycles can help you make informed investment decisions and build a resilient investment strategy. As an investor, whether you are familiar with these terms or not, both bear and bull markets will have an influence on your portfolio.
In this article, we’re going to provide an overview of bull and bear markets and discuss some strategies that investors use to navigate market volatility.
Understanding a Bull Market
A bull market refers to a market condition when investment prices are rising for a sustained period of time: 20 per cent or more from the most recent lowest point. Bull markets are usually associated with a strong economy, high gross domestic product (GDP), and low unemployment rates.
During bull markets, public sentiment is mostly positive – investors are willing to buy and hold investments as their value is expected to rise. Such a trend is underpinned by overall confidence in the economy and the stability of future investments.
When the economy is strong and unemployment is low, consumers can afford to buy more products and use more services, which further strengthens the value of assets they invest in.
Because investment market changes are significantly impacted by how individuals interpret the economy, investor sentiment affects whether the market will rise or fall.
Bear Markets Explained
When investment prices decline for an extended period of time, usually 20 per cent and more, it signifies the market has dropped into bear-market territory. As investment prices continue to fall, investor confidence drops, and a negative sentiment grows – driving the value of securities down.
Bear markets can be triggered by global events – a pandemic, for example – and contrary to bull markets, are often accompanied by a weak economy and higher unemployment.
It is common to confuse a bear market with an economic recession. Although the two generally go hand in hand, they are associated with different issues. The former describes a stock market decline due to negative investor sentiment, often caused by fear or uncertainty. The latter is a slowdown of the entire economy: a significant decline in economic activity and GDP.
Economic recession may cause a decline in investment prices, but there are other factors that may affect investors’ outlook and cause market fluctuations, including the following:
- Natural disasters, pandemics, etc.
- Wars and conflicts
- Government policies
- Concerns over inflation and deflation
- Technological changes
- Corporate performance
- Interest rates
Unfortunately, bear markets can occur at any time and without warning, so investors can be easily caught off guard. While it is very difficult to predict when the next bear market will take place and for how long it will last, one thing is historically consistent – bear markets happen and are a normal part of the long-term investment cycle.
Since both bull and bear markets are difficult to predict, investors can typically only recognize the phenomenon after it has happened, thus the labeling of these unique market conditions is done in hindsight.
Investing During Increased Market Volatility
Market uncertainty can naturally cause panic and lead to poor investment decisions. During bear cycles, many investors are affected by widespread pessimism and try to sell their securities as quickly as possible.
Be aware of this and avoid selling out of fear. Keep in mind – bear markets tend to be much shorter than bull markets, and returns investors gain in bull markets have historically been higher than the losses they encountered in bears. Bear markets can also provide long-term investors with an opportunity to buy investments at a lower price.
The following investing principles can help you handle increased market volatility:
1. Leave Your Emotions Behind
Investing based on emotions is one of the main reasons why many investors are buying at market tops and selling at market bottoms. Taking a rational and realistic approach to investing, when markets seem to have taken a dramatic turn, is essential.
In bull markets, investors might be inclined to believe that the market will continue to rise and, therefore, be willing to take more risk than they can afford to take. Conversely, in bear markets, investors might sell their investments too quickly and risk facing losses that might otherwise be temporary.
That’s why it is important to look at the big picture because rash decisions can negatively impact your sort-term and/or long-term investment strategy.
2. Keep a Long-term Perspective
Instead of focusing on short-term losses, stick to your long-term financial plan. By following a well-defined investment strategy and staying on course during increased market volatility, you have better chances of reaching the financial goals you’ve set for yourself.
3. Diversify Your Assets
Allocating your investment money across a broad range of companies, industries, and investment asset types, that may react differently to the same economic event, can help your portfolio weather the ups and downs of financial markets.
Asset allocation can help to lower overall risk because some asset classes will only be mildly affected, and some might even benefit. Diversification won’t prevent losses, but it can potentially cushion the impact of bear markets on your investments.
4. Seek Professional Advice
Working with a registered investment advisor can help you make informed investment decisions. Based on the assessment of your investment goals, financial situation, and risk tolerance, a registered advisor may suggest different scenarios to act on.
5. Keep Learning
With the increasing popularity of a wide variety of social media, more and more people turn to these platforms as a place to find investment opportunities and look for investment advice. While interactive media can provide benefits for investors looking for more information about investing, they can also open up opportunities for fraudsters to share misinformation and use people’s understanding (or lack of understanding) of a specific market condition for their personal gain. It’s important to be careful with anything you see or hear on social media, especially concerning extreme market predictions.
As part of our mandate as a provincial regulator, the BCSC provides trustworthy and unbiased information to help investors get educated through InvestRight.org. Take advantage of our free online resources to boost your investing knowledge and become a more informed investor.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393, or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.