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What you need to know about bull and bear markets

The bull and bear are important elements of the financial markets and although their use has the power to influence investor behaviour, many are unaware how to invest to make the most of these market trends.

When you invest, you want to protect your money and grow it for the future.

Financial markets rise and fall by their very nature, which can be off-putting for some investors, as it can mean losing money. But this dynamic is crucial if you want to grow your wealth as it allows investors to benefit from market fluctuations – buying low and selling high.

What is a bull market?

A bull market, or bullish conditions, describe a market where prices are rising or expected to rise. It symbolises financial optimism, investor confidence and prosperity.

Synonymous with Wall Street, a bronze bull statue was installed in New York following the 1987 financial crash to reflect the strength and determination of the American people.

Bull and bear markets coincide with the four stages of the economic cycle: expansion and peak, followed by contraction and trough.  

The beginning of a bull market can generally be seen as an indicator of economic expansion, as perception on the economic outlook drives stock prices.

What is a bear market?

The bear market, or bearish conditions, describe a market where prices are falling. Widespread pessimism can whip up negative sentiment, which can become self-fulfilling. Bear markets can be seen as precursors of economic contraction.

Bearish people may want to sell their investments or take short positions in the market. Figures can vary, but it’s widely considered that a downturn of 20% of more over at least two months signals the beginning of a bear market.   

It’s important to note that this 20% is just a threshold we’ve imposed to define market movements. When a market loses 20%, nothing particular special happens. In fact, markets can bob in and out of a bear market for some time.   

A bearish investor might sell their investments after some news. A bullish investor might read the same information and see it as an opportunity to invest.

The precise origins of these names are unclear, although it’s thought to be based on the way the animals attack; bulls lift their horns upwards, whilst bears swipe down.  

How long does the bull market last?

The average bull market lasts nine years, research from First Trust Advisors shows, and generates an average cumulative return of 472%. Bear markets are more short-lived, however, with the average downturn lasting 1.4 years and losing an aggregate of 41%.

It’s up for contention, but many investors believe the S&P 500 is enjoying its second longest bull market on record. Since the index troughed in 2009, it’s returned an annualised 17.5% – healthy but not excessive by historical standards¹. However, many have argued that the S&P 500 isn’t the best measure of a bear market.

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What causes a bull market

The psychology that drives investor decision-making makes both markets self-fulfilling. When markets start to rise, investors want to buy into the market to get a piece of the action. The more people entering the market, the higher prices are chased as demand supports loftier valuations.

When sentiment turns, investors become nervous. As investments are sold, prices fall, and investors look for the quickest exit in an attempt to protect their returns.

These knee-jerk reactions can cause more harm than good, however, by locking investors out of the market when prices recover.

It’s time in not timing the market that helps you achieve your long-term financial goals. If an investor had invested in the S&P 500 index from 1994-2014, they’d have generated an annualised 9.85% return, research from asset managed JP Morgan shows.

If this investor had missed the 10 best days of performance, however, they’d have made just 6.1%.

How to spot a bear market

It’s  difficult  timing market-moving events, and many investors can get their fingers burnt in the pursuit of timing the market spot-on. Whilst investors are constantly monitoring and analysing the market, they don’t always react in the way you’d expect.

For example, equities currently look expensive on traditional pricing valuations and there has been a lot of geopolitical uncertainty that would traditionally make investors nervous. Despite this, volatility is extremely low and stock markets still look  strong as better- than-expected earnings prop up valuations.

Why invest in a bear market

When you’re investing for the future, a long-term strategy will give you the scope for higher returns as you can afford to take more risk with your money. As we’ve already said, to generate meaningful returns you’d ideally invest when the market is at its lowest and sell when it’s at its highest.

By investing in a downturn, many investors will try to benefit from a future rally after a decline in an investment’s price.  It takes some nerve putting money into something that’s been flashing red for a while and recoveries are usually far from plain sailing. Shorter-term horizons can really suffer.

It can also be difficult to identify a short-term dip to a long-term correction in an asset’s price – the price might never recover if the underlying fundamentals change.

How to invest in a bear market

Instead, a little and often approach to investing can help smooth out the amount you pay for an asset over time and can be especially useful in times of volatility or turbulence.

This approach allows you to ignore market speculation and avoid knee-jerk reactions that could leave you out of pocket.

These long-term decisions can help you avoid making poorly-timed and potentially costly mistakes. You probably won’t remember the short-term fluctuation of today in a decade or so.

¹ CNBC,Second-longest bull market ever aging gracefully, but investors wonder how long it will last

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