Continuing the Investing Series, today we are going to talk about bear and bull markets.You may have heard people talk about bear and bull markets before, but do you know what those terms mean? It’s not as simple as “market is up, market is down.” We are in a bull market right now, but there is a lot of talk out there about a coming bear market. Here’s a quick lesson on what these terms mean, and what they might mean for you.
What is a “Bear Market”?
As you know, the price of securities (think stocks and bonds) goes up and down over time. When the securities market is down for a prolonged period, it’s known as a bear market. There isn’t a standardized definition, but generally speaking a bear market is when there has been a 20% or more downturn over a 2-month period, in multiple areas of the market.
Bear markets are more serious than corrections, which are short-term down markets. A bear market will likely induce pessimism and even fear in investors. The problem here is that when investors panic and sell their securities, it can drive prices down. That, of course, compounds the problem. They will often sell for less than a security is reasonably worth in their haste to get out, further driving down the market.
According to Investopedia, we have a bear market on average once every 3.5 years. That means that you have likely lived through several. I hope that fact, combined with the fact that the market has lately been reaching ever-new highs, makes you realize that bear markets are a natural occurrence in the market and not something to panic about.
What is a “Bull Market”?
On the opposite side of the spectrum is the bull market. Where bear markets are when securities go down for several months, bull markets are when they go up. Though you might hear someone say the market is “bullish” if there is a short term run up, in reality a bull market is when there is sustained growth.
Of course, investors will start to feel optimistic when they see prices rising, so people will often pour more money into the markets. They don’t want to miss out on those gains! This can drive prices up….which can lead to overpriced securities…which can lead to corrections and possibly bear markets. It’s a vicious circle, isn’t it? But a profitable one if you can hold on!
Why Do We Call Them Bear and Bull Markets?
Uhhhh… no one knows for sure. There are a few common theories.
- Bears are sluggish. Bulls are lively. That’s kind of how the securities markets act when they are down and up. Bear markets are slow and lumbering and seem to take forever to get anywhere. Bull markets are powerful and move quickly.
- In the 1700s, bears and bulls were pitted against each other in animal fights as amusement. Ugh. Anyway, the bears would swipe down with their paws to fight, while the bulls would thrust its horns up. Thus, bear market = down and bull market = up.
- Another story is that the terms are based on bearskin traders. There was often a middleman between the guy who actually killed the bear, and the person buying the bearskin. The middleman would often sell the bearskin before he actually had it, hoping to sell at a high price and then buy from the hunter at a lower price. That’s how he would make his profit. The middlemen became known as bears, and were associated with hoping prices would fall in the future. Thus, bear markets. Bulls, on the other hand, were people who bought stocks hoping they would rise in price. They would “toss stocks up” with their horns.
What Should You Do In Bear and Bull Markets?
My advice? Change nothing.
It’s quite common, and understandable, for people to freak out in a bear market and pull their money out. This is generally a bad idea, because you are basically deciding to sell at a loss and take yourself out of the game, thus missing any comeback. If your investments are properly diversified, the best idea is generally to sit tight and ride out the waves.
During a bull market, you might get excited and think you are going to miss out. This can cause people to pour money into the market and try to chase returns. This is also a bad, bad idea.
You Will Not Be Able To Perfectly Time Bear and Bull Markets
Do me (and yourself) a favor. Don’t try to time the market. Repeat after me. DO NOT TRY TO TIME THE MARKET. You will not be successful in the long run. Sure, you might do well once or twice, and then you are going to think you are an investing genius. You are not an investing genius. If you were, you wouldn’t be reading this blog. This blog isn’t for investing geniuses. I know this, because I am not an investing genius.
The wise and wonderful Warren Buffett has thoughts on bear and bull markets. His recommendation runs counter to what the common investor does. Of course, Warren Buffett is not a common investor.
Most people should just make a financial plan and stick to it. If you really, absolutely, must do something different when the markets change, go against the grain and put some extra in when the market is down. Don’t panic and sell out (unless you aren’t diversified, but that’s a whole ‘nother convo). Buying in a down market is the closest you can get to buying securities on sale. And in the long run, the price is going to go up, so you might as well buy when it’s a little cheaper. Just keep that “diversified” word in your head.
This isn’t trying to time the market. I’m not saying you should closely analyze what is happening and jump in when the market is at the bottom. You won’t be able to predict the bottom. What I am saying is that if prices are 20% lower today than they were 6 months ago, and they always go back up, then eventually they will reach that point again and you will have made a profit. Eventually. The prices may go down before they go up again. Don’t try to time the bottom of the market, either.
If investing while security prices are headed down scares the living daylights out of you, just do nothing. This is why I recommend setting up your investments to occur automatically and only checking on them once a year. Maybe every quarter if you are really, really curious. Remove the temptation to time the market.
Are We About To Enter A Bear Market?
I have absolutely no idea.
The market does seem to be rising quite rapidly, in all the wisdom my 12ish years of paying attention can provide. That’s not a ton of experience. While I’ve lived through a couple of recessions, I only paid attention to one and it was when I was still new to investing so I didn’t have a lot of skin in the game.
Recessions, btw, are when the market has gone down for two consecutive quarters, or 6+ months. Different than, but related to, bear markets.
We might have a correction. The correction might be followed by a bear market. I really don’t know. I’m not worried about it. The market goes up, and the market goes down. I try not to fret over things I have absolutely no control over.