Bull Market or Bear Market: Which is Better for Individual Investors?
December 14, 2020
Financial markets are often described in one of two ways, and each is associated with an animal. In good times, when markets are rising, employment is high, and the economy is strong, we call it a bull market.
When prices go into a prolonged decline, unemployment is rising, and the economy is weak, we call it a bear market. Generally, investors consider it to be a bear market when prices have fallen by at least 20 percent from a recent high.
The terms bull and bear are also used to describe the attitudes and emotions of investors. Optimistic investors who expect prices to keep rising are seen as ‘bullish,’ while pessimistic investors who expect declines are called ‘bearish.’
In a bull market, demand for stocks is high while supply is low – investors are eager to take part in the favourable market, but must find someone willing to sell. These conditions help drive prices higher.
The opposite is true in a bear market: supply grows as investors try to sell off their holdings before prices fall even further, but demand is weak. As a result, prices tend to keep falling.
Bear markets can be caused by a number of different factors, including anxiety or irresponsibility among investors, external factors such as a natural disaster (or a global pandemic), even a crisis in one part of the financial system that spills over into other areas (as seen in the 2008 financial crisis, which began with a mortgage crisis that led to multiple bank failures).
Needless to say, market conditions (and general investor sentiment) will have a direct impact on the performance of your investment portfolio. The rising prices of a bull market typically increase your wealth, while the declines of a bear market are likely to drive down the value of your holdings.
No matter whether the market is rising or falling, it’s always wise to evaluate your personal situation before making investment decisions. Are you just starting out, or are you close to retirement? Are you considering starting a family or buying a home? Your situation, and any expected changes in the coming months and years, will inform your investment strategy.
It’s also a good idea to examine your portfolio to make sure your holdings are suitably diversified before making new investments. Concentrating your holdings in one area of the market leaves you susceptible to volatility, so look for opportunities to broaden your portfolio whenever possible.
Here’s a quick look at what individual investors should try to do in both a bull and a bear market.
How to invest in a bull market
When evaluating buying opportunities in a bull market, look for businesses with strong fundamentals and those that have widespread strength and public appeal. Taking a risk on a new company could get you big returns, but the safer bet is buying into an established business with a record of success.
In general, you’ll have to pay more to get involved in a bull market because demand will outstrip supply. Ideally, you’ll be able to recognize a market’s bullish characteristics early enough to find bargain buys before prices soar. This will save you money on your initial purchase while also maximizing your eventual return.
If you choose, you can sell off stocks after they’ve demonstrated a suitable increase in value. However, a common strategy worth following is to buy with the intent of holding on to stocks and equities for years or even decades, rather than trying to time the few weeks or months when the stock is rising quickly.
How to invest in a bear market
If you’re close to retirement or not in position to withstand a downturn of any length, the best way to insulate your portfolio against the negative impacts of a bull market is to sell as early as possible and keep most (or all) of your holdings in cash or fixed-income securities.
If your investment time horizon is longer and you don’t have a short-term need for the money tied up in your investments, a bear market can offer buying opportunities and the chance to maximize return by acquiring desirable stocks when they are trading below (sometimes well below) their normal value.
Buying during market declines is the typical strategy of value investors, who then seek to hold on to those assets long enough to take advantage of their eventual rise. It’s like buying an item on clearance with the knowledge that its value will increase over the long term. Of course, it’s important to point out that this won’t necessarily happen with every stock - some companies simply can’t recover from serious downturns - so always research your investments beforehand, seeking out businesses with strong fundamentals and an established track record or clear indicator of consumer interest and demand.
Finally, remember that it’s unwise to try and time the market, making a guess as to when it won’t go any higher or lower. No matter how experienced and educated an investor you may be, there’s always unforeseen risk with such a strategy. Better to buy something you’re comfortable holding for years and years, even if it declines in the short term, rather than buying something more risky that you’re hoping will rebound and make you rich.
Both bull markets and bear markets offer opportunities for investors to grow their wealth, and long-term investors can follow similar strategies in either scenario. While you’re likely to do better in a bull market, it still requires careful choices when making investment purchases. Ultimately, what’s best for each individual depends on personal circumstances, investment time horizon, and overall risk tolerance.
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