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Sunday, April 14, 2024

Bullish vs. bearish investors: What’s the difference?

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If you pay attention to the stock market, you’ve likely come across references to bulls and bears. But what’s the connection between these animals and investing? Let’s delve into the meaning behind terms like bullish and bearish.

What it means to be bullish

Being bullish refers to the expectation of price increases within a given timeframe. This term applies to various market indexes, like the S&P 500, as well as specific industries, asset classes such as real estate or commodities, and even individual stocks. To better understand this concept, envision a charging bull raising its horns, symbolizing the anticipation of prices surging higher.

A bull market does not have a specific definition, but it refers to a sustained period when prices rise and are generally expected to continue doing so. Typically, a bull market is considered to have occurred when prices have increased by 20 percent or more from a recent low.

On average, a bull market lasts for about four to five years. However, it is worth noting that the longest bull market in U.S. history lasted nearly 11 years, starting from March 2009, around the end of the Great Recession, and continuing until the onset of the global pandemic in March 2020.

What it means to be bearish

Conversely, being bearish implies an anticipation of price decline over a given period. This concept applies to various financial assets and can be used to describe the outlook for an individual stock, such as Tesla, or stocks in general. To aid in remembering the bearish nature, envision a bear forcefully swiping down on its prey.

A bear market represents the antithesis of a bull market, signifying a prolonged phase of declining prices. Typically, a bear market is characterized by a minimum 20 percent decrease from a recent peak. Notably, bear markets tend to be shorter in duration compared to bull markets in the stock market.

In March 2020, the U.S. stock market entered a bear market, experiencing a rapid decline of more than 30 percent within weeks. However, the subsequent recovery was equally swift, giving rise to a new bull market later that year.

In January 2022, U.S. stocks experienced another bear market as investors grappled with concerns surrounding high inflation, rising interest rates, and the looming possibility of a recession. However, after approximately 10 months, the bear market for the S&P 500 officially came to an end on October 12, 2022.

How to invest during bull or bear markets

Being able to predict the start and end of bull or bear markets would allow you to strategically adjust your investments and capitalize on the shifting conditions. However, in reality, by the time these market trends become evident to investors, it’s often too late to fully exploit the change.

When it comes to stocks, it is crucial to remember that they are a vital component of your long-term investment strategy. Throughout your investing journey, you will encounter both bull and bear markets. However, it is worth noting that stocks generally have an upward trajectory over time, meaning you are more likely to experience more bull markets than bear markets.

Consider the merits of holding low-cost index funds for the long haul and be prepared for the inevitable ups and downs along the way.

One strategy that can help you capitalize on the market’s fluctuations is known as dollar-cost averaging. By consistently contributing and investing over time, you can purchase more shares when prices are lower and fewer shares when prices are higher.

These contributions can be made through a workplace retirement plan such as a 401(k) or your own traditional or Roth IRA. This approach allows you to take advantage of market opportunities while maintaining a disciplined and long-term investment strategy.

Bottom line

Bulls are optimistic, believing that prices will rise, while bears are pessimistic, expecting them to fall. Instead of trying to predict the start or end of a bull or bear market, focus on integrating your investments into your comprehensive financial plan and maintaining a long-term perspective.

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