Scan any newspaper today and you'll see terms referring to the market performance as a "bull" or a "bear". These are colourful ways to discuss market cycles.
Let us take you through the terms to explain why markets go through these cycles and how you should respond to them for peace of mind as a long-term investor.
What is a bull market?
A bull market is a sustained period, typically spanning months or years, when prices rise. The term is most often used to refer to the stock market, but it can also be applied to other asset classes, such as bonds, real estate, and commodities.
A commonly accepted definition of a bull market is when stock prices or a stock index (e.g. S&P 500) rises by 20% or more, after two previous declines of 20% or more.
A bull market is generally characterised by a strong economy with rising gross domestic product (GDP) growth, falling unemployment, and improving investor confidence. There tends to be stronger demand for stocks and a higher level of overall market activity.
The most recent bull run started in March 2009 and ended in March 2020, due to the global coronavirus pandemic.
What is a bear market?
A bear market is the inverse of a bull market. It is defined by stock prices or indices falling by 20% or more from recent peaks.
The general investor sentiment during this period is pessimistic, and the economy experiences slower growth. Companies may scale back their businesses, and unemployment typically rises. Usually, a recession will follow a bear market.
The recent 2020 bear market had the fastest plunge and was short-lived, lasting from March 2020 to August 2020.
How should I ride through market cycles?
Markets, just like the economy and weather, are cyclical.
Bull markets do not last forever, and will inevitably lead to bear-market territory due to macroeconomic factors, geopolitical crises, or irrational investor exuberance. During a bear market, investors are attracted to low prices and will reinvest, eventually leading to a bull market again.
Bull and bear markets are simply part of the natural flow of the financial markets. It is impossible to predict with certainty and accuracy when the market will peak or bottom out — we will only know in hindsight.
It is common to see some investors fall into the trap of emotional investing, jumping on a hyped stock when its price is high or overreacting to a single news report.
But such a strategy of trying to predict where the market is going next is difficult to sustain. Some investors may make a killing once in a while, but this will likely be accompanied by huge losses at other times, resulting in volatile and inconsistent returns.
Regardless of what is happening in the markets, you should maintain a long-term focus to cultivate long-term wealth.
Buying and holding a carefully curated portfolio based on your financial needs is a wiser strategy to achieve more consistent and steady returns, and to prevent emotions from interfering with your investment decisions.
A popular investment strategy is dollar cost averaging (DCA), which is when you invest a fixed amount at specific time intervals, thus diversifying the timing risk with regards to the market. DCA can help you remain invested during a bull market, while allowing your portfolio to benefit from corrections and crashes as well.
At the end of the day, time in the market is more important than timing the market, when it comes to achieving your long-term financial goals.
Here's why regular, disciplined investments make sense in a downturn. To get started with Endowus, click here.
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