So I’m going to break it down for you here.
Bear markets and bull markets are symbolic names for different periods in stock market history. They explain the types of returns investors received during the periods in question.
Ultimately, knowing what a bear market or bull market is doesn’t matter much in the big scheme of investing. I keep investing whether the U.S. is in a bull market or a bear market. It doesn’t matter to me. If you have an investing strategy as I do, you should know how you plan to invest no matter the market.
However, understanding bull and bear markets is helpful when you’re first getting started in investing. In fact, learning these terms can help you figure out how much risk you’re willing to take when you do invest.
Bull markets and bear markets may vary depending on who you ask
It’s important to know that a bull market and a bear market don’t have strict definitions. There is no government rule stating precisely what these are.
For instance, if I’m focused on bull and bear markets based on the S&P 500, they may be slightly different than the bull and bear markets on the Dow Jones Industrial Average (DJIA). Some people may focus on the highest high and lowest low. Others may only use data for what the stock market closed at on any given day.
That said, bull markets and bear markets have a generally accepted definition.
What is a bull market?
Most people refer to a bull market as a period where a particular index, such as the S&P 500, has grown by 20% following a prior decline of 20% or more. The bull market continues until the next drop of 20% or more.
If the U.S. was currently in a bull market and the S&P 500 dropped 19%, we’re still in a bull market despite the 19% drop. Stocks could move higher for months or years before completing the 20% drop. The bull market ends at the highest point right before the S&P 500 has a full 20% drop.
Some people take this a step further and require the high and 20% drop to both occur at the market’s close. While trading may have been higher or lower than the guidelines during a trading day, these people only consider entering or leaving a bull market when the market closes over the 20% barrier.
What is a bear market?
A bear market is the opposite of a bull market. A bear market occurs when an index drops 20% or more following a prior gain of 20% or more. Like a bull market, the bear market will continue until a 20% gain occurs.
Essentially, a bear market is what follows a bull market. Once the index hits its high and then declines by 20%, the bear market has started. In order for the bear market to end, the index has to hit it’s low and then increase by 20%, starting the next bull market.
To give you a better idea of how bear markets and bull markets compare historically, look at this data.
This data comes from CNBC and is based on the S&P 500 index. Technically, the S&P 500 wasn’t around at the beginning of this chart, so backtesting was likely completed to provide values prior to the index’s start.
|Start date||Bull or bear market?||Return through end of the run|
|02/19/2020||Bear||Has not ended|
This table can give you an idea of how risky it is to invest in the S&P 500. At any time, a bear market could be around the corner that’s ready to take a substantial chunk out of your investments.
You should only be invested if you’re willing and able to withstand the downtimes. If you would end up selling before hitting the bottom of the bear market, you may need to be in more conservative investments. If the decline wouldn’t cause you to change your strategy, it may be a suitable investment for you.
When you look at the above table, it’s easy to think the bear markets aren’t that bad and the bull markets are amazing. This is misleading. A market can only go down 100% while it can go up an unlimited amount.
To recover from a bear market, the returns will have to exceed the percentage loss of the bear market. Since you’re probably sitting there wondering what the heck I’m talking about, here’s an example that makes this easy to understand.
Let’s say a bear market starts when stocks peak at 10,000. The bear market results in a 50% reduction in the market. It ends at 5,000.
Then, a bull market takes place. If the bull market increased the value of stocks by 50%, the market would only be at 7,500. In this case, stocks would have to increase 100% to reach the previous mark of 10,000.
Even with big bear markets, history shows that stocks continue to climb. If the S&P 500 index actually existed on June 1st, 1932, it would have been at 4.40 points. At its all-time high less than 100 years later, it was at almost 3,400 points in February 2020.
When should you invest?
You’ll never really know…so start now!
Knowing when exactly to invest is impossible to predict. In order to have a perfect investment streak, you’d have to make so many perfect calls it would be impossible.
First, you’d have to invest at the absolute low of a particular investment. Then, you’d have to sell at the very peak of that investment’s value. After that, you’d have to predict when the investment hits bottom and buy it back. You’d have to continue this process forever.
When you’re looking at historical charts and returns, this seems easy. Unfortunately, figuring out when to buy and sell during these tumultuous times is much harder to predict.
At the beginning of 2019, the world didn’t know a pandemic would take place in 2020. Similarly, most people didn’t think a financial crisis was coming in 2008 just a couple of years before.
Keep investing regularly
The stock market as a whole appears to continue rising over longer periods. For that reason, it is often suggested that people should regularly invest in an investment that fits their risk profile.
The key is staying invested over the long-term. If you try to time the market by buying and selling when things get bumpy, you may miss some of the best returns.
By investing for a longer time frame, you can wait for the bear markets to end and the bull markets to return. Hopefully, the bull market returns continue to exceed the bear market losses and your investments continue reaching all-time highs.
I personally invest in a very similar way. I invest in index funds and don’t plan to touch the money for decades.
I contribute money to my investments on a regular basis and don’t try to buy and sell to increase my returns. Instead, I have confidence in the markets’ long-term returns.
Where to start investing
Now that you understand bull markets and bear markets, you might be wondering how you can start investing.
Here are two options that might fit your needs depending on your personal situation.
Those getting started investing that don’t have much of an idea of what they want to invest in may find Betterment to be a great solution. Betterment is a robo-advisor which means they use technology instead of an in-person financial advisor to help you invest.
This can be an excellent option for beginner investors because many in-person advisors won’t work with you unless they earn significant commissions from what you invest in. Betterment, on the other hand, only charges a 0.25% assets under management fee in addition to the expenses of the investments you hold.
Betterment can help you figure out your risk tolerance and find a suitable portfolio for you to invest in. They also take care of other tasks such as rebalancing your portfolio as needed and tax loss harvesting. The best part is, Betterment doesn’t have a minimum to start investing like many financial advisors or other investment companies might.
Visit Betterment today or read MU30’s full review.
You Invest by J.P. Morgan
You Invest by J.P. Morgan is a great investing platform for experienced and inexperienced investors alike.
For starters, self-directed traders who know what they’re looking to invest in will love the zero fees and no minimum balance requirement that You Invest Trade offers. On the other hand, those who want a managed option will only pay 0.35% annual advisory fee to have their portfolios completely managed for them.
And since You Invest is run through Chase, you can manage your You Invest account from the same dashboard and mobile app that Chase credit cards and bank accounts operate from. Having one app that can do everything is a big plus when it comes to bundling your banking needs.
Visit You Invest by J.P. Morgan or read MU30’s full review.
Disclosure – INVESTMENT PRODUCTS: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
If you have a good idea of your risk tolerance, what you want to invest in, and how you want to invest in it, Fidelity might be a good choice for you. Fidelity offers several types of accounts you can use to invest including retirement accounts, such as IRAs, as well as taxable brokerage accounts.
When you’re ready to pick your specific investments, Fidelity has a wide range of low-cost options to choose from. They even offer $0 commissions on stocks and ETFs as well as some index mutual funds with zero expense ratios. Keeping your investing costs low allows you to further grow your investments through compounding returns.
Fidelity also offers research, tools, calculators, and market insights to help you stay on top of your investments and future investing options. If you have any questions, Fidelity has 24/7 customer support by phone or online chat. They even have local investor centers you can visit in person.
Visit Fidelity today or read MU30’s full review.
While it’s important to know the difference between a bear market and a bull market, it’s equally as important to know that they shouldn’t determine your whole investing strategy.
Instead, keep investing regularly, and plan to stay in your investments for the long-haul.
- Why Stock Market Volatility May Be Good For You
- How To Invest In Stocks – The Beginner’s Guide To The Stock Market