The stock market is a cyclical market, meaning that there are short to medium term periods where the general trend is up, and other periods where the general trend is down.
These are called bull markets and bear markets, and today I’m going to discuss the key differences between the two, and some useful tips for navigating both bull and bear markets for long term success.
What Are Bull And Bear Markets?
A bull market is a term used to describe an extended period of asset class growth and appreciation.
This is a time where:
Prices go up.
Sentiment is positive.
Greed is common.
The opposite is called a bear market, and this is a general term for a period of price declines.
This is a time of:
Growing fear.
Investments being sold.
Poor economic outlook.
The best way to remember the two is to imagine how the two animals would go about attacking you.
Bull - would use their head in an upwards motion to attack you.
Bear - it would use it’s entire body in a downwards motion to attack you.
You could just about make a case for any point in time being a bull, or a bear market, and you can use these 3 key indicators to tell…
Key Differences
Price Action
The easiest way to tell if we’re in a bull market or a bear market is to look at the price actions of popular investments.
Firstly, you can look at large cap growth stocks:
Apple.
Google.
Microsoft.
If the majority of these are gaining value, there’s a high chance you’re in a bull market. It’s not a guarantee, but it’s strongly correlated.
Or, you could take a more broad approach and look at broad or global index funds to see which way the general trend of the market is headed.
Funds like:
The S&P 500.
The Total Stock Market.
Nasdaq 100.
Which track large numbers of investments, can give you a good indicator as to whether the current trend is up, or down.
Sentiment
Sentiment is something that’s a little harder to get a good read on, but you can certainly get a general idea of the market by studying the feelings and actions of investors themselves.
Sure, it’s not as accurate, because everyone has different opinions, but if you’re looking in the right place, you can get a good read on the overall sentiment of the market.
This can help you figure out if we’re in a bull or bear market, and also how close we might be to transitioning from one to the other.
Economic Outlook
Economic outlook is another great indicator of where the stock market might be headed.
Key economic indicators like:
Interest rates
Inflation
Unemployment rates
House prices
Can be strong indicators for future price actions.
Just take the COVID pandemic for example. In the aftermath of COVID, stock prices soared, but so did inflation.
By the time inflation was nearing double digits in 2022, combined with the outbreak of the conflict in eastern Europe, it almost a guarantee that we were going to enter a bear market.
Navigating A Bull Market
By going off the three indicators above, here are 3 tips to help you navigate a bull market.
Keep Buying
Just because prices are going up, that doesn’t mean you should stop buying.
Nobody knows where the short term market top will be, so it’s best to continue to buy regularly to make sure you’re continuing to add to your portfolio.
The last thing you want to be doing is to stop buying, upon the expectation of a market downturn, only for the market to continue to rise.
This is why I’ve always advocated for the strategy of dollar cost averaging, regardless of market conditions.
This way, you continue to gain exposure of a wide range of price points, and over a long period of time, you’ll always be a winner.
Don’t Succumb to Greed
You soon realise that investing is more psychological than you think, and emotions like fear and greed can play big parts in your overall performance.
If the general trend is up, it’s in your subconscious to believe that it will continue to follow that pattern.
As a result, investors can get greedy after entering what’s called a “state of euphoria”.
A feeling where you feel invincible, and that you can’t lose money.
If you have this feeling, tread carefully. Stick to your plan, and don’t over leverage yourself, because one wrong move and it can all come crashing down.
Don’t Be Pressured Into Selling
If you’ve got a similar investing strategy to me, you’ll never sell your investments.
But, if you’re like me, you’re always keeping up to date with other people’s opinions on the market, a bit like the sentiment I spoke about earlier.
And this is fine, but the one thing you need to acknowledge is that not everyone has the same investing strategy.
Some prefer a more passive approach, but others might prefer a strategy which involves more buying and selling.
So, if you hear someone who’s opinion you value, say “I’m selling”, this might sound alarming in relation to your strategy, but could be routine in relation to theirs.
So, don’t feel the need to listen to everyone, and copy what they do, because it could have bad implications on your overall performance.
Navigating A Bear Market
Here are 3 key tips for navigating a bear market.
Buy More As Fear Increases
One of my favourite investing quotes from Warren Buffett is
“Be fearful when others are greedy, and be greedy when others are fearful.”
It’s a simple take that suggests by doing the opposite of most other investors, you stand a pretty good chance at succeeding.
I’m not saying go all in at the sign of fear or panic, because you never know where the markets are headed.
But, if you’re someone who deposits regularly, it could be lucrative in the long term for you to increase your deposits during a bear market, whilst prices go down, for a better reward in the future.
You could be looking back on a bear market and thinking “I wish I invested more back then.”
Don’t Panic Sell
Much like the greed element in a bull market, bear markets are rife with fear, and panic.
You’ll literally see people predicting the end of the world as we know it because their investments went down 10%, and it can be alarming for a less experienced investor, or an investor who is experiencing their first bear market.
Coming from someone with more experience, it’s important to ride the waves of the market, knowing that there are better times ahead.
Think Long Term
It can be hard for an investor to see beyond tomorrow, or next week, but the best investors are necessarily the ones with the most knowledge.
They’re the ones with the most patience.
You’ll look back on bear markets not with regret that you didn’t sell, but with regret that you didn’t buy more when prices were going lower.
This with the longest time horizons will always end up on top, because they know that a small bump in the road will have little to no effect on the beauty of the destination.
If you’re able to get to a point where you’re planning in years and decades, rather than days and weeks, you’ll be in a much better position.
