What is a bear market?

Posted by siteadmin on Tuesday 6th of August 2019.

The world of investing can often seem like it’s filled with jargon and confusing phrases. Among those may be ‘bear market’ and ‘bull market’. When you’re reading the financial papers of newspapers or browsing online, these terms are likely to crop up, but what do they mean?

Bull markets: A bull market is typically characterised by optimism and economic growth; financial markets are rising or expected to rise. When the stock market is bullish, it’s anticipated that strong results should continue for an extended period of time. There’s no universal metric for measuring a bull market, making it difficult to measure when it’s going to happen. However, a bull market is commonly defined as a period where stock prices rise by 20%.

Bear markets: In contrast, bear markets see stock prices falling and are linked to a pessimistic outlook of how investments and wider economies will perform. Again, there’s no universal way of defining a bear market.

Stock markets are currently described as a bull market that’s lasted around ten years, beginning with the recovering of the 2008 financial crisis in 2009. That means that the outlook for investments has generally been optimistic for about a decade, though dips and volatility have still occurred. This long cycle and economic indicators mean some investors may have concerns that a bear market is on the horizon.

Can understanding bear and bull markets increase investment performance?

First, it’s important to recognise that investment markets are continuously rising and falling, reflecting wider economic changes. As a result, the terms bull and bear market tend to refer to a trend that lasts several months or years, rather than looking at a snapshot. So, even when the market is described as being bullish, you may experience volatility that means the value of investments fall.

Secondly, it’s also vital to note that the terms may refer to either the investment market overall or certain assets that are being traded. Therefore, how your investment portfolio is affected will depend on the assets it holds.

Finally, whilst bear and bull markets typically follow economic cycles, it’s difficult to predict consistently when trends in the markets will change. This is why timing the market is near impossible, even for professional investors. Analysts will often note a bull market after the trend has happened, for example, rather than predicting it.

As a result, it’s incredibly difficult to recognise when a bull market may become a bear market in order to improve investment performance.

Should you change your investment strategy?

When you read about the current bull market turning into a bear market, you might be tempted to change your investment strategy to reflect this. A quick look online and you’ll find a huge variety of ‘advice’, from suggesting you diversify your portfolio with stocks from emerging markets to backing firms that are regarded as reliable. The conflicting information can mean it’s difficult to know what to do.

The often-opposing information reflects that investment strategies should represent your aspirations and financial situation; what is right for one investor may not be for another. So, when looking at whether you should make changes to your investment strategy, it’s important that you look beyond the stock market cycle and predictions for what may be ahead.

Remember: You should invest with a long-term plan

The old investment phrase ‘it’s time in the market, not timing the market’ that investors should focus on highlights why it’s important to have a long-term plan.

Volatility and the shift between a bear and bull market will occur and can’t consistently be predicted. However, a robust financial plan that considers your personal situation should take these changes into account. No one likes to see the value of investments fall, but when you look at the bigger picture and what you want investments to achieve, the peaks and dips should be smoothed out.

The cycle of investment markets is one of the reasons why investing should only be a consideration if you have a long goal timeframe, typically a minimum of five years.

If you have any questions about your investment portfolio or where appropriate opportunities for you may lie, please get in touch.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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