While the coronavirus pandemic, trade war, and other factors have given rise to a bear market, eventually the stock market will recover and enter a new phase: the bull market. ¡Olé!
In a bear market, folks are often encouraged to withdraw from risky investments and diversify their portfolios. But what should you do when the market bucks and transforms into a bull market?
While the coronavirus pandemic has no end in sight, eventually the world and the markets will adapt to a new normal. To make sure you’re ready for the future bull market, your friends at Academy have some tips to help you understand this phenomenon so you can plan your future investments.
What is a bull market?
During a period of robust economic growth, markets do better and investors are more optimistic. A bull market may happen when unemployment rates decrease, consumers spend more instead of saving, and investors flock to markets. Investors’ optimism and hopes for positive returns as well as the real performance of companies on the market fuels the demand for securities like stock and bonds.
In turn, this increase in demand raises prices and boosts the overall performance (and profitability) of the stock market, bond market, or of a given company. The market may increase by 20% or more during a bull market.
Read also: Bull and Bear Markets: How to tame these beasts
It’s impossible to tell how long a bull market will last, how dramatic it will be, or exactly when it will begin. For example, the United States has experienced a number of bull markets following the Great Depression. Between 1987 and 2000, the market increased in profitability a staggering 582%. This was great news for investors.
Considering that investors can make a lot of money during the bull market and that they tend to occur after a period of economic downturn (like the coronavirus pandemic and the global recession associated with it) people are anxiously awaiting the end of the current bear market and the beginning of next bull market. When will it arrive?
Is the bull market returning?
In short, there’s no way to tell yet. Historians, epidemiologists, and economists all have differing views on how the market will behave in the coming months as we adapt to a new normal. After all, the coronavirus is still wreaking havoc on communities around the world, quarantine continues, business is fluctuating, and we’re unsure when (or if) a vaccine will become available.
It seems too early to be able to confidently predict the return of a bull market. To try to gain insight, some economists point to how the US entered a serious recession after the Spanish Flu ended.
However, others say that the 1918 Spanish Flu Pandemic isn’t an adequate comparison for a number of reasons — the age group it affected, the country’s prior infrastructure and economic health, the political climate, and other factors may mean that the two pandemics affect the economy differently.
All in all, that means it can be difficult to predict when a bull market may return.
What should I do during a bear market?
Needless to say, investing is always risky because it’s impossible to tell for certain how a market will perform. To figure out what you should do during a bull market, make sure to incorporate the following skills into your financial planning:
1. Diversify
Don’t forget smart investing principles during a robust bull market. You may be tempted to spend more than you should on investing because of optimism in the market, but keep your goals clear by diversifying and establishing your risk tolerance.
Diversifying your investments can make you more resilient to market fluctuations. In addition to stocks, bonds, and other opportunities, you may consider incorporating some lower-risk options like exchange-traded funds or mutual funds. While higher-risk investments (like startup investing) may pan out during a healthy market, these stable securities incorporate a mix of stocks and other financial instruments that are lower-risk over time.
2. Evaluate your risk tolerance and consider new investment options
First things first: be clear about the amount of investment risk you’re willing to tolerate. Don’t be overly swayed by market optimism and make overly-risky investments that could seriously hurt you if they turn out badly. You should periodically consider factors like your financial goals, investment timeline, and income.
During a bull market you may find that increasing dividends or new sources of income allow you to invest in high-risk high-reward opportunities that you wouldn’t normally consider. If that’s the case, that’s great — but make sure you make your decision based on the reality of your situation, not the expectations of other investors. If you’re not sure how to do this, consult a trusted financial professional.
3. Don’t make emotionally-based investment decisions
It’s tough to hold onto stocks when you see how they fluctuate from day-to-day. Remember that simply because a company performs poorly or a particular stock loses value one day doesn’t mean that the bull market is over. It’s normal for prices to fluctuate over time.
If you sell during a sudden downward turn, you may end up losing money in the long-run because you lose out on the opportunity to make profits in the future. Over time, the stock market has performed well and investors with a diversified portfolio have been able to make profits.
Whether you find yourself in a bull market or a bear market, making emotional decisions can cause you to lose sight of long-term goals and lose money. Remember that the cheap investments that you acquired during a bear market generally gain value during a bull market.
It’s tough to know when the economy will roar back into a bull market. But by understanding what a bull market is and some strategies to plan for it, you can improve your financial fitness.
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