Bear vs. Bull Market: What Is The Difference For Investors?

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Students want to know about bear vs. bull markets in Australia and their investment benefits.

 

There are two phrases that most investors are very familiar with - bull and bear markets.

 

They both describe market performance but are entirely different regarding their impact on your portfolio and the investment decisions you make.

 

A bull market happens when the economy expands and securities rise. In contrast, a bear market occurs when the economy shrinks and securities decline sustainably.

 

This blog discusses bull and bear markets - bull and bear market definition, their differences, and their significance in investment decision-making.

 

 

1. What Is A Bull Market?

 

Bull markets occur when other significant macroeconomic variables increase, such as gross domestic profit, corporate earnings, and consumer spending.

 

It is characterised by the following:

 

  • Significant upswings in the markets

  • Upbeat and confident market sentiments 

  • Higher trading volumes 

  • Additional liquidity opportunities for stock sellers.

  • Periods of strong economy and job growth

  • Asset prices in a financial market increase considerably over an extended period

  • A 20% or more increase in a broad market index from the 52-week high over two months. 

 

The longest bull market in history began in 2009 and went through 2020.

 

Do you wonder - why is it called a bull market? Investors are often classified as bulls and bears.

 

The words "bull" and "bear" to define markets come from how the animals attack their enemies. The act of a bull thrusting its horns up into the air describes the movement of a bullish market.

 

 

2. What Is A Bear Market? 

 

A bear market is characterised as:

 

  • A pronounced market downturn. 

  • A shrinking economy 

  • Periods of economic decline 

  • The asset prices in a financial market decrease considerably over an extended period

  • Low investor confidence and pessimistic market sentiment

  • A broad market index declines by 20% or more from recent highs for over two or more months

 

An example of a bear market is the financial crisis 2008 saw the S&P 500 decline by almost 40% during the 2008 calendar year.

 

Major geopolitical and macroeconomic shifts cause a bearish market. Some key contributors are inflation, interest rate hikes, war between nations, reduced consumer spending, and more.

 

Have you wondered why it is called a bear market? It is because the market imitates the action of a bear swiping its paws downward when attacking its opponent.

 

 

3. Bull Market Vs. Bear Market

 

A "bull" investor buys shares as he expects the market to rise, whereas a "bear" investor sells shares anticipating a market downturn anytime soon. In a bullish market trend, bulls dominate the market and vice versa.

 

It is common to find bullish and bearish phases in the stock market. Understanding their similarities and differences will help you form an effective investing strategy and investment decisions.

 

 

Similarities

 

  • Both a bear and bull market represent a substantial percentage of movement in the market. 

  • Both are tied to the economic direction and can indicate economic changes in various economic factors. 

  • Political or economic factors drive both kinds of markets. Fears of an economic downturn or recession fuel bear markets. In the bull market, robust economic and job growth might encourage a rise in the stock market.

 

 

Differences

 

The share market is often described as a bull or a bear market. But what do these terms mean? Here's a summary of the bulls and the bears and what they mean for investors.

 

Bulls are driven mainly by economic strength, whereas bear markets usually happen during rising unemployment and economic slowdowns.

 

Instead of buying into the market, investors prefer to sell and often move their investments to fixed-income securities or cash. The outcome is a seller's market.

 

Let's discuss the significant differences between these markets:
 

Factor Bull Market Bear Market
Direction of the market Represents a rising market. 20% rise after two 20% falls Represents a declining market. 20% fall from recent highs.
Average profit or loss The average cumulative gain is over 339%. The average cumulative loss over a period is 38%.
Average Length Tends to last for a longer time of 6.6 years on average The average bear market duration is 1.3 years
Economic state Expansion in the economy with a high employment rate Shrinking economy with rising cases of job losses and unemployment
Investors sentiment Positive Pessimistic
Type of investors dominating the market More buyers More sellers
Focus Increased buying in growth stocks, gold, silver or real estate. Diversion to long-term fixed-income assets like bonds
GDP (Gross Domestic Product - GDP) High GDP and consumer spending Low GDP and consumer spending
Interest rates Low interest rates High-Interest rates

 

 

4. How Do You Invest During A Bear Market vs. Bull Market?

 

Understanding risk and potential opportunities in bear and bull markets and your risk tolerance is the key to creating a sound investment plan.

 

We have some tips to help you get started in bulls and bears trading to make the most out of both market phases:

 

 

Don't Let Emotions Take Charge of You

 

It's normal to feel worried when the value of your investment portfolio drops.

 

To make wise decisions, focus on your knowledge of investments instead of being afraid that the stock market won't bounce back.

 

Also, be cautious about rushing into investments when you notice a rapid rise in stock prices during good market times. Before investing, take the time to thoroughly examine the company's financial health.

 

 

Don't Try To Time The Bottom or Peak of The Market

 

No matter how knowledgeable or experienced an investor is, no one can flawlessly predict the rise and fall in the market.

 

The following strategies can help plan your investment in bull and bear market phases:

 

 

Diversify Your Investment Portfolio

 

Investing across multiple asset classes is another way to protect your portfolio from investment risks. In an uptrend market, your volatile assets could grow; in a downtrend market, conservative assets stabilise your portfolio. 

 

Thus, having varied types of assets helps spread out investment risk and reward and enables your investment to grow gradually over time.

 

 

Rebalance Your Portfolio Regularly

 

You should assess your portfolio periodically to ensure it is not overweighted or underweighted in any area.

 

It helps prevent your holdings from becoming overly aggressive or conservative. It aligns with your goals, investing horizon, and risk tolerance.

 

 

Dollar-Cost Average

 

It is a risk management trading strategy involving consistently investing the same amount in both market ups and downs.

 

As you consistently purchase the stock at relatively lower prices, the per-share value gradually decreases over time.

 

 

Ride Out The Market Direction

 

Seeing big changes in the stock market, whether it's going up a lot or down a lot, can be really stressful.

 

But if you stick to your long-term investment plan, it can help you handle these ups and downs better.

 

 

5. Frequently Asked Questions (FAQs)

 

 

Do You Buy During A Bull Market?

 

As a bull market emerges, investors are drawn to acquiring stocks, ETFs, and mutual funds.

 

As the bull market persists, some may contemplate divesting some of their equity holdings to maintain a balanced investment portfolio.

 

One significant challenge investors face during a bull market is their hesitancy to liquidate assets for cash. Investors must understand that they may not be able to sell their holdings at the stock market's peak before executing a buy trade.

 

 

Is It OK To Invest in a Bear Market?

 

A bear market can be riskier, as most equities lose value and become volatile.

 

As figuring out a market bottom is tough, investors usually withdraw their funds from a bear market and cash it until the trend reverses.

 

 

How To Invest in a Bear Market?

 

When investors anticipate a bear market, it can be wise to consider buying lower-risk investments currently priced lower.

 

Some attractive opportunities may be available to navigate the challenges of a bear market without giving in to panic and selling investments at a loss.

 

One way to reduce your investment costs is by using a Robo advisor. Additionally, adjusting your lifestyle to spend less can help you, giving you more time to build up your retirement savings.

 

 

How Long Does a Bull Market Last?

 

Bull markets are more frequent than bear markets; their average duration is from a few months to several years.

 

Usually, a bull market lasts for around 2.7 years or about 973 days. But the longest one happened from 2009 to 2020 and made stocks go up by more than 400%.
 

 

What Is The Longest Bear Market in History?

 

The duration of bear markets can vary widely. Some bear markets last for several years, while others are shorter, lasting only a few months.

 

The longest bear market, "The Great Depression," was from March 1937 to April 1942 that lasted for 61 months".

 

 

How Long Does A Bear Market Last?

 

Bear markets within a recession may take longer than those in overly-priced healthy economies. Historically, bear markets are shorter than bull markets and last for ten months on average.

 

 

Does a Bear Market Mean A Recession?

 

A bear market and recession aren't the same:

 

A bear market is a continued period of decreasing asset prices, marked by a decline of at least 20% if the asset price changes from its recent highs.

 

Conversely, recessions are economically significant and long-lasting events that may require government intervention for correction.

 

A bear market signals a market correction rather than a recession that reduces inflated market prices without a sudden economic downturn. Bear markets or recessions don't cause or lead to one another but overlap due to similar economic symptoms.

 

 

Do Bear Markets End Before The Recession?

 

Bear markets may finish before the recession, as technical factors and market sentiment drive them and pertain to a drop in asset prices.

 

Recessions involve broader economic indicators and may last through various sector-specific dips.

 

 

Is a Bull Market Good or Bad for Investors?

 

Is a bull market good? Compared to bear markets, investing in a bull market is favoured as surges have been stronger and longer. Over time, the bulls have succeeded as the market has posted positive results.

 

However, your investment in a bull market can only be fruitful strategically. Before investing, analyse your risk tolerance and plan your investment accordingly using the right strategies.

 

 

How Do Bear Markets Trick Investors?

 

Bear markets constantly trick investors, making it essential for investors to understand their mischievous behaviour and safeguard themselves.

 

The way bear markets trick investors by giving them the illusion that they have reached the end. Mounting explosive one-day rallies often turn out to be baits that entice and lure naive investors back into the market.

 

 

How Do You Profit From a Bear Market?

 

Learning about the bear market's meaning, what smart investors do in a bear market, and their common investing behaviours can help you build a profitable investing strategy in a bear market.

 

  • Like ordinary investors, savvy investors don't become overly optimistic in an uptrend market and overly pessimistic in a downtrend market. They perceive that bear markets present the best buying opportunities as stocks become overvalued in bull markets and trade at cheaper valuations in bear markets. So, they believe market downturns are the ideal time to invest and make the most of your money in the stock market.

 

  • Smart investors stand out from the rest for their ability to pick winning investments. They believe that not all beaten-down stocks are worth buying. Investors should seek businesses with robust future growth potential and a competitive advantage.

 

  • A Level-headed mindset is a common attribute of intelligent investors. To them, the key to making good money through stock investing is to remove the fear of bear markets. Staying invested through bear markets and holding your stocks through market volatility increases your chances to reap the maximum benefit when the market rebounds. 

 

 

Should You Keep Dollar Cost Averaging in a Bear Market?

 

Dollar-cost average is one of the effective risk management trading strategies that can help minimise your losses in bear markets.

 

It involves consistently purchasing an exact number of shares at periodic intervals, both in market ups and downs.

 

Over time, it may help you pay less per share overall and increase your chances of higher profits.

 

 

What Is The Average Return After a Bear Market?

 

Looking at the historical returns, people who invested in bear markets likely see gains.

 

Their investments prove rewarding when stocks roar back over 1/3/5/10-year periods.

 

The data published on Forbes shows that since the beginning of a bear market, the Nasdaq has given an average return of 22% after one year, 52% after 3- years, 87% after five years, and a massive 328% over ten years.

 

(Past performance does not guarantee future results.)

 

 

How Much Cash Should You Keep in a Bear Market?

 

As no one knows when the bear market will end, it is essential to have adequate cash deposits to meet your 3-6 months of monthly expenses and any short-term expenses you have planned.

 

After completing these requirements in the bear market, you could invest some or all the remaining funds.

 

High-yield savings accounts are ideal to keep, access, and earn interest on your savings. You could also consider certificates of deposits and money market accounts.

 

 

Should One Invest in Bull or Bear Stocks?

 

Bear markets can be daunting and challenging.

 

Whether to invest in bull or bear stocks depends on the investment outlook or asset, risk tolerance, investing time horizon, and long-term goals for each type of investor.

 

Different sectors perform well in other market trends. While in a bull market, tech stocks usually experience a rally, consumer and utility stocks are favoured in bear markets.

 

Rather than choosing stocks for a specific market direction, one should have a mix of bear and bull stocks to benefit from all market environments.

 

Diversifying and periodically rebalancing your portfolio to fit your situation can help you to stay on track.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

Is a Bear or Bull Market Better for Investors?

 

Both market types are ideal for investment based on your outlook, risk tolerance, beliefs and tendencies, and investing strategies.

 

Paying attention to your behaviour and tendencies is essential when deciding which market to invest in.

 

Bull markets can force you to make financial decisions based on emotion and take on more risk with an expectation the market will continue to rise. In contrast, in a bear market, you may make rash decisions based on your fear, like exiting the market with a loss.

 

The next factor to consider is the investor's belief. A bullish investor believes the stock's value will rise and places a long trade to benefit from the price increase. In contrast, bearish investors focus on shorting a stock to take advantage of the dropping prices.

 

Analysing your risk-taking capacity is also essential. You require greater risk tolerance when investing heavily in a bear market. Buying low can yield higher profits, but losses will accrue if prices keep falling.

 

Ideally, your investment portfolio should comprise bull and bear stocks to remain stable in both market phases and allow you to capitalise on both uptrend and downtrend markets to generate returns.

 

Periodically rebalancing your portfolio can be beneficial. Increasing stock allocation in a bull market can yield higher returns following a "buy-low and high-sell strategy ."

 

In a bear market, you must exercise caution when investing in equities due to the higher potential for losses. Switching to conservative investment options like fixed-income securities is beneficial in this regard.

 

If you are still deciding which market to trade in, seeking assistance from a financial advisor is beneficial. It can help you create a diversified investment portfolio to weather challenging markets, make logic-based investment decisions, and avoid timing the market.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. This is not financial advice.

 

 

6. Conclusion

 

Both bear and bull markets are part of the average long-term investing cycle.

 

Investors should construct their portfolios in a way that allows them to weather both kinds of market environments.

 

Following a more balanced approach is usually the best action for many investors.

 

 

The advice and information on OzStudies.com is in general nature and should not be seen as a replacement for independent financial advice. We strongly encourage readers to consult with financial experts regarding their own financial decisions and investments.


Please note that the information presented on OzStudies.com is solely for educational purposes. Every individual's financial situation is unique, and the products and services we mention may not suit everyone. We do not provide financial advice, advisory, or brokerage services nor endorse buying or selling specific stocks or securities. It's essential to know that information might have changed since publication and past performance does not guarantee future results.

 

 

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