Updated May 2020: Although originally published in 2018, this article is sill relevant during the worldwide 2020 pandemic. A recent conversation with my friends prompted me to write this blog post. Many of us had seen dramatic dips in our investment portfolios when the Dow Jones plunged by over 1,000 points two days in a row in February 2018. While some of my friends were freaking out about their losses and wanted to sell, others planned to ride it out. Hearing their different investment strategies put a lot of things into perspective for me like trading times. When is the right time to buy and sell?
I also realized that in addition to making sense of the most common investment terms and knowing the best trades to learn, investors (especially beginners) have to understand that the stock market is volatile. It can change quickly and unexpectedly, so if you’re in the game, you have to be able to take on some risk and roll with the punches.
Although it’s true that we’ve been experiencing a strong economy since the 2008 financial crash, it’s clear that we cannot get too comfortable. That’s why we have to recognize market trends, and know how we will react when we meet them. In particular, we’ll be talking about the bear market and bull market.
In a nutshell, the bear market and bull market describe how the market is doing. Essentially, they indicate the direction the market is going, either up or down.
Fun Fact: Bear and bull markets are named after how bears and bulls attack their prey. Bears attack with their claws aiming downwards while bulls attack by lifting their horns upwards.
Bear Market, Bull Market and Market Correction
What is a bull market?
A bull market refers to when the market is on the rise. Stock prices are increasing and investors are feeling good. They have a positive outlook and so, they buy with the hopes to make a profit.
Bull markets are typical when the economy is strong and unemployment is low.
When I visualize the bull market, I like to think of the iconic Charging Bull sculpture in Wall Street which depicts financial optimism and prosperity. He looks powerful.
On the other hand, a bear market describes when stock prices are declining.
What is a bear market?
A bear market is when stock prices are declining by 20% or more for at least 60 days.
If the decline lasts less than 60 days it’s considered a “market correction”.
Bear markets are typical when the economy is weak and unemployment is high. As a result of the pessimistic outlook, investors tend to sell stocks with the hopes of preventing further losses.
Bear markets are common. We experience a bear market on average every 3.5 years. Our last bear market was in March 2009 – more than 8 years ago so technically we were overdue.
What is a market correction?
A market correction is when stock prices decrease by 10%.
A market correction is a temporary decline that interrupts the upwards trend. It’s shorter than a bear and bull market, however, it’s not a crash. It’s an indicator that investors are turning pessimistic.
Generally, we experience one market correction a year. Experts are calling what we experienced in February 2018, a market correction. We’ve had 123 market corrections from 1900 to 2013.
The stock market is cyclical, there are times of growth and times of pullback. The markets cannot go up all the time so dips are normal and healthy. I know this is probably not what you want to hear but it’s the truth!
So brace yourself and expect declines periodically. Better yet, plan for them – what will you do when the market takes a nose dive?
Although the market is stable now (when writing this in 2018), here are four lessons that investors can walk away with from the most recent February 2018 market correction:
- Avoid making financial decisions based on a bad day, week or month.
- Think long-term and do your best to contain your emotions; do not act impulsively.
- Throughout your lifetime, you’ll experience a ton of bear and bull markets and temporary market corrections. Don’t get spooked. If you’re young, you’ve got time to bounce back, recover and grow.
- Lastly, when stock prices are plummeting, it’s a great time to buy stocks discounted. So no crying over spilled milk. Take advantage of limited-time opportunities that emerge.
Update May 2020: Wondering how I handled losing 20% of my retirement portfolio during the 2020 pandemic? Press play and listen to this episode where I share my honest reaction.