The stock market may often look and feel like more of a gamble for new investors than a profitable investment. The market’s constant ups and downs can make anyone overthink whether they’ll see large financial gains or damaging losses.
The world of investing can seem confusing, but the more you understand stocks and market conditions, the better you can manage your money. And while it’s always a possibility that you may lose money, with enough time and proper planning, investing in the stock market can be a great way to grow your money.
You’ve likely heard the terms “bull” and “bear” floating around the investing world. These terms are frequently used to describe market conditions and how the stock markets are doing in general. Put simply, whether they’re appreciating or depreciating in value.
As an investor, the market’s direction is a significant force that has a considerable impact on your money. You must understand how each of these market conditions may impact your investments and financial stability.
Bull Market vs. Bear Market
A bull market is the type most desired for most investors, as the economy is strong and doing well. Market conditions are favorable, stock prices are rising, unemployment is low, and overall, the economy is growing. As stock prices continue to rise, there tends to be more buyers than sellers in the market, as more investors take advantage of the money-making opportunities present within this type of market.
When prices drop anywhere between 10% to 19%, this is known as a market correction. A bear market is a market condition where stock prices have fallen even further than a market correction—20% or more—over at least two months. In simple terms, a bear market occurs when the economy isn’t doing well, and share prices continuously drop.
A bear market may be accompanied by a recession, a period of time when the economy stops growing, and instead falls, leading to high unemployment rates.
What to do in each market
If your goal is to build a long-term investment portfolio, then investing your money into the market over the course of a few decades is the best strategy. Without spending hours each week delving into specific stocks, you can continue to invest in both bull and bear markets in accordance with your personal risk tolerance.
How to invest in a Bull Market
As we’ve discussed, bull markets are accompanied by periods of economic growth and optimism among investors. Remember that during a bull market, any losses should be minor as well as temporary.
Some tools you can use to invest in rising stock markets include:
📈Long positions. When investing in a bull market, the ideal thing you can do is to take advantage of rising prices by purchasing stocks early (if possible) and then selling them later on when they’ve reached their peak. A long position is precisely that—it’s the purchase of stock in anticipation that its price will rise. The overall goal is to purchase the stock at a low price and then sell it for more than you paid. The difference will represent your profit.
📈Calls options. Calls options are financial contracts that give you (the buyer) the opportunity to buy a stock, bond, or other assets at a particular price (the strike price) until a specific date. As the underlying stock’s price rises, calls will go up in value. If the stock price grows further than the option’s original strike price, the buyer can exercise the right to purchase the stock at the lower strike price and then sell it for a higher price on the open market—thus generating a profit.
How to invest in a Bear Market
Bear markets are defined as a drop of 20% or more in a market average and generally occur during economic recessions or depressions. But amid the pessimism and rubble lie various opportunities to make money—should you know how to use the right tools. Prepare for a bear market by decreasing the risk in your portfolio and selecting specific bonds or mutual funds that will perform better in a bear market. These include gold funds, as well as sector funds that specifically focus on health care and consumer staples.
Here are some other ways you can profit in a bear market:
📈Increase the amount of cash and decrease the number of growth stocks in your portfolio. Reduce your stock allocation in any riskier investments and begin building your bond fund and money market fund positions. This will help lower your overall portfolio’s market risk.
📈Purchase stocks at reduced prices from corporations and entities that have weathered economic downturns before. Many long-term investors advise you purchase ‘toothpaste stocks’—stocks in companies that produce items people will always need such as toothpaste, toilet paper, or other living necessities.
How long do Bull and Bear Markets last?
No one can truly predict when a bull or bear market will arrive, or how long they will stay. They have the potential to last a decade, like the latest bull market that started in March of 2009, or it could last just a few months. Similarly, bear markets can hang around for years, or they can vanish within a few months.
While the major highs and lows in the market can be nerve-wracking, the market has continued to rise throughout the years. If you look at the stock market index for the past century, you’ll see that it has dramatically increased. It’s been a bumpy ride, but the market continues to improve its performance over the long term.
Historic Market Ups and Downs
Bull Markets History
The longest bull markets took place in the following periods:
📈 The Peacetime Boom Bull Market—1949-1956: up 267% over six years.
📈 The 1970s Economic Recovery Bull Market—1974-1980: up 122% over six years.
📈 The Reagan-era Presidency Bull Market—1982-1987: up 229% over five years.
📈 The Technology Boom Bull Market—1990-2000: up 417% over ten years.
📈 The Pre-Global Financial Crisis Bull Market—2002-2007: up 102% over five years.
The most recent bull market is the longest in history, running from 2009 to 2020, returning 348% over almost 11 years.
Bear Market History
As of September 1st, these are the worst bear markets in U.S. history:
📉 The 2008 Bear Market—2007-2009: down 59% over 27 months.
📉 The 1973 Bear Market—1973-1974: down 48% over 21 months.
📉 The Great Depression Bear Market—1929-1932: down 86% over 34 months.
The most recent U.S. bear market was triggered by the COVID-19 pandemic of 2020, causing economic shutdowns in most developed countries. The stock market’s historic rapid plunge into a bear market in early 2020 was a direct reaction to the speed at which economic uncertainty spread. The Dow Jones Industrial Average and the S&P 500 Index both fell more than 20% from their 52-week highs in February, leading to a stock market crash in March.
The Bottom Line: Prepare for Different Markets
It’s recommended that you begin to prepare your portfolio for bear and bull markets before they begin, rather than waiting until you know for sure which has started. Work to build both a strategy and a portfolio structure before you begin to purchase stocks.
Methods such as creating a diverse portfolio, tactically allocating your assets, keeping an eye on market indicators, and building a financial plan can help you keep your portfolio earning. By building your free financial plan with Savology, you’ll be able to avoid the panic that other investors will feel when the bear stands up.
Your financial future starts today
Savology has helped more than 50,000 households across the United States improve their financial well-being by providing effective financial planning in just 5 minutes. Users can get started with our free financial planning or premium monthly planning memberships, allowing them to build a personalized financial plan, holistic report card, personalized action items, and more. In addition to our consumer-facing platform, we’re helping employers across the country provide their employees with effective financial wellness benefits.