The Update

Bull Markets vs. Bear Markets: What You Should Know

The investing world is full of complex terminology, and some of it can be intimidating for those of us who are new to the stock market world. For example, you may have been warned that a “bear market” is coming — or you may have heard how lucky you are to be investing during a “bull market.” But what, exactly, do these terms mean — and what should first-time investors know? Here’s a rundown.

Defining Bull Markets and Bear Markets

What Is A Bull Market? When you think of the term “bull” market, imagine a charging bull. It’s fired up and ready to run, knocking down any obstacles in its path. A bull market is an “up,” market, with stocks charging forward, and earning money. Technically speaking, we’re officially in a “bull” market once stock prices have risen more than 20% off a low, and are expected to continue going up.

What Is A Bear Market? When you think of a “bear” market, imagine a sleepy hibernating bear cuddled up in his cave for winter. He’s slow, tired, and sluggish. A bear market is a “down” market, with the stock market taking a nap, and either losing money, or not earning much. We’re officially in a bear market when stocks close 20% lower than they were from the highest point recorded in the previous year.
 

When Do We See Bear Markets Vs. Bull Markets — And What Do They Mean For Investors?

Over the past 97 years, there have been 11 Bull and Bear Market cycles, according to research by First Trust Advisors. The longest bear market in history was during the Great Depression, which lasted nearly three years. It was shortly followed by a bullish four years. Since then, there have been the occasional two-year-long bearish dips – including during World War II and the 2008 Great Recession, but there have also been four bull markets that lasted more than ten years each.

The good news for investors is that bull markets have historically lasted much longer than bear markets. According to research from wealth management firm Stifel, over the last 90 years, from 1933 to 2023, the average bull market lasted 4.9 years, while bear markets lasted just 1.5 years. Best of all? Bear markets over the last 90 years offered an average cumulative total return of 177.6%, while bear markets saw losses of 35.1%. An enormous difference!

So, what does this mean for investors? For starters, this data proves the advice given by financial expert Jean Chatzky and her team at the InvestingFixx investing club for women: “It’s about time in the market, not timing the market.” It means that the total number of years we have our money invested in the stock market are far more important than trying to take our money in and out of the market at the “right” time.

Indeed, not only is it impossible to know the “right” time to take our money in and out, but also the data proves that those who stay in the market for the long haul (riding out the “bear” times and enjoying the “bull” times), are those who come out on top in the long run.

How to Invest In A Bull Market Vs. How To Invest In A Bear Market

Bull Market Investing: People who get into investing during a bull market may think investing is “easy.” But the key, explains Certified Financial Planner Michelle M. Vargas, founder and president of Waymaker Financial Planning, is to not “get caught up in the excitement of a bull market.”

She says that managing our investments wisely — and cautiously — is just as important as eating a balanced diet. “Just as we all need to eat green vegetables, we all need to ensure that our investments are balanced too. This diversification is important no matter what kind of market we are in,” Vargas says.

The most common mistake that investors make, she explains, “is thinking that a bull market will last forever. Sometimes greed sets in, and money that was set aside for emergencies or home equity is used to invest. This is detrimental to your long-term plan.”

Bear Market Investing: Unless an emergency or unforeseen expense has you desperate for cash, try, as the British say, to “keep calm and carry on.”

“In a bear market,” Vargas says, “if you have established a properly diversified portfolio, and have adequate cash reserves for emergencies, it is important to stay the course. Remind yourself of your long-term goals and how your investments are helping you to meet your goals.”

During a downturn, it’s all the more important to remember that the market cannot be timed. “In order not to lose money, you must be right 100% of the time on the day you choose to get out of the market, and then be 100% right on the day you decide to get back in,” Vargas says. “This is nearly impossible. Focus on what you can control. Revisit your asset allocation and check to see if your portfolio needs to be rebalanced. Make sure your yearly management fees are in line with industry averages. Finally, tune out the noise and sit tight!”

If you’re nearing retirement when a bear market hits, one of the best ways to make it through the downturn is to alter your spending plans. Making changes to your budget, and reducing the amount you have to withdraw from your retirement savings until the markets turn, can help you level the playing field when it comes to meeting your ultimate goals for retirement, college, or whatever you’re aiming for.