What's the Difference Between a Bear and a Bull Market?
In the stock market, there are two signs to look for: the bull and the bear. A bear market occurs when stocks are down 20% or more, whereas a bull market occurs when the market is significantly up. Both are natural parts of the stock market's lifecycle, and knowing what to expect can help you make better investment decisions.
What Is a Bear Market?
Bear markets happen when stock prices on major market indexes, like the S&P 500 or the Dow Jones industrial average (DJIA), drop by at least 20% from their recent highs. In contrast, a market correction is a drop of at least 10% that usually lasts much less time. Most of the time, corrections don't turn into full bear markets. But when they do, the average drop from the market's most recent high to the beginning of a bear market is 32.5%.
A slowing economy and rising unemployment rates often lead to a bear market. Investors tend to be pessimistic about the stock market during this time, and the changes in the stock market may be followed by a recession. But a bear market doesn't always mean there's going to be a recession. About 70% of the time in recent history, a recession has come after a bear market.
During a bear market, many investors may want to sell their investments to protect their money, get cash, or switch to more stable securities. This can cause a sell-off, which makes stock prices drop even more. It could also make investors sell their investments for less than they bought them for, which could make it harder for them to reach their long-term financial goals. Since World War II, bear markets have happened less often, but they still happen about once every 5.4 years. You can expect to live through about 14 bear markets in your lifetime.
How Long Does a Bear Market Last?
In the past, bear markets have been shorter on average than bull markets. A bear market lasts, on average, only 289 days, which is just under 10 months. Some bear markets lasted for years, while others only lasted a few months. The Great Depression, which lasted from March 1937 to April 1942, was the longest bear market. It lasted for 61 months. In the last few decades, however, bear markets have tended to last less time. For example, in 1990, a bear market only lasted for three months.
Since World War II, the average time for the stock market to recover or reach its previous high is about two years. But it's not always like that. The most recent bear market began in March 2020 and ended in August, when stock prices were at all-time highs. On the other hand, the Great Recession, which was the last bear market, didn't end for about four years.
It's important to remember, though, that the stock market can make big gains even when it's in a bear market. For example, over half of the best days for the S&P 500 in the last 20 years came during bear markets.
What Is a Bull Market?
A bull market happens when a major stock market index rises at least 20% from its recent low. During a bull market, stock prices rise steadily, and investors are optimistic and encouraged about the stock market's future performance.
Bull markets show that the economy is doing well and that unemployment rates are generally low. This gives investors more confidence and gives people more money to invest. This can lead to a huge amount of growth: During bull markets, stock prices go up 112% on average.
How Long Does a Bull Market Last?
Bull markets can last anywhere from a few months to a few years, but they usually last longer than bear markets. They also happen more often: 78% of the time in the last 91 years has been a bull market.
A bull market lasts on average for 973 days, or 2.7 years. From 2009 to 2020, which was the longest bull market, stocks went up by more than 400%.
What Should You Do in a Bull or Bear Market?
Most people don't feel too much stress during bull markets, but people often feel anxious and uncertain during bear markets. But how you should handle a bear market depends on how long you plan to keep your investments.
If You’re Decades Away from Your Goal
If you are in your 20s, 30s, or even 40s and investing for a long-term goal like retirement, try to keep your stocks and keep investing no matter what the market is doing. If you have a diversified portfolio, your strategy and holdings were made with both bull and bear markets in mind. While you might be tempted to sell off your investments in a bear market to prevent more financial losses, doing so locks in the losses you have already incurred. You then have to make the hard decision of when to get back into the stock market.
Timing the market is known to be hard, and you never know when the market will hit its bottom. If you move your investments to cash for a month while you try to figure out if the market has hit its bottom, you could cut your investment returns by more than 30% compared to someone who stays invested the whole time.
Instead, you should see bear markets as chances: When you're young, a bear market gives you a chance to buy stocks at lower prices before they go back up. And if you use dollar-cost-averaging, which is when you invest in a security over time instead of all at once, you lower the chance that you'll pay more per share than you would otherwise. In fact, you might end up paying less overall per share.
You should try not to sell when the market is going down, but a bear market may also remind you to rethink your investment plan once the market turns around. Even though you know the market will get better, you may find that you are not as willing to take risks as you thought.
If You’re Nearing Your Goal:
If you're getting close to the end of your investment time frame, which means you're only a few years away from when you want to retire, you have less time to recover from bear market dips. Even though we know that the market has always bounced back after a bear market, your investments may not take the average of two years to get back to where they were.
That's why we always recommend monitoring your portfolio over the course of your life to adjust your portfolio allocation and to rebalance as needed. That could mean buying or selling different securities to keep a good mix of stocks, bonds, and cash that fits your financial goals and level of risk tolerance.
If you don't know how to rebalance your portfolio so that it fits your timeline and your willingness to take on financial risk, you might want to talk to a financial advisor to make sure you have the right mix of investments and diversification.
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If You’re Retired:
Once they no longer have an active source of income, many people change their investment strategies from growth to preservation. That usually means putting more cash, bonds, and fixed-income investments in your portfolio than you did before. Actively taking money out of a limited nest egg also brings a new risk: that you take out more money than you can afford during bad markets or times of high inflation and end up running out of money. The good news is that you can combat this worry with a rule called the 4% Rule.
The 4% Rule says that the first year you retire, you can safely take out 4% of your retirement savings. Then you can safely withdraw the same amount each year, adjusted for inflation, without running out of money for at least 30 years and in some cases for up to 50. Notably, the research that led to the 4% Rule found this to be true in both bull and bear markets.
Still, if you're worried about how the stock market will do when you retire, you might choose to take out only 3% of your portfolio. We highly recommend speaking with a financial advisor or tax expert to figure out the right withdrawal rate for your assets and level of risk tolerance.
The Bottom Line on Investing Through Bear and Bull Markets:
Bear markets can be scary, but they are a normal part of the economy and often lead to even better market returns. With a diversified portfolio built around your financial goals, you can be sure to stay the course and ride out any market!
I hope this clears up any questions you have regarding bear vs. bull markets. If you have any other questions, feel free to reach out! I’d be happy to chat with you.
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