Bull and Bear Markets: What Do They Mean for Your Investments?

KLOFinancial |

A bull market is a market that is on the rise, while a bear market is a market where most stocks are declining in value. A bull market is typically understood to mean a rise of more than 20% from a recent low, and conversely a bear market a fall of more than 20% from a recent high.

The actual origins of these expressions are unclear, but one reason could be that bulls attack by bringing their horns upward, while bears attack by swiping their paws downward.

The Covid-19 pandemic caused the biggest stock market sell-off since the great financial crisis of 07/08. During March this year, global stocks saw a downturn of at least 25%, and 30% in most G20 nations. All indices experienced wild volatility and had entered ‘bear market’ territory. What was interesting was the range of reactions to this volatility amongst my clients.

Some, understandably, became fearful and I received several calls from clients asking whether it was a good time to sell investments down to cash. This kind of reaction is known as ‘loss aversion’ – the instinct that if they remain invested, they stood to lose even more money. Remember, you only actually lose money when you sell assets that are worth less than they were when you bought them.

This is why it’s so important as an adviser to impress upon clients at outset that they must be prepared to see the value of their investments go down, as well as up, and that short-term volatility is a normal part of investing. More experienced investors have learned that even though it can be scary to watch your portfolio value fall in a declining market, it is worth it to sit tight and wait for the upturn to come, because it will come.

Some of my clients are looking to retire over the next year or so and there are some who are already making regular withdrawals from their investments. Those clients may not have time to wait for markets to recover, but they understand from our previous conversations that it is important to be flexible, if possible, in the timing of taking benefits. This led, in some cases, to clients deferring their retirement plans and/ or reducing or suspending their withdrawals until markets fully recover.

Bear markets are almost always followed by bull markets

Take a look at the graph below. This shows every bull and bear market over the past century (pre-Covid 19). The average bull market lasted 7.9 years. The average bear market? 1.3 years.

The most important thing to keep in mind during an economic slowdown is that it is normal for the stock markets to have negative return years—it’s part of the business cycle.

A bear market is only ever temporary. Perhaps the most famous investor of all time, Warren Buffett, said that it is wise to be “Fearful when others are greedy and greedy when others are fearful.” In other words, be contrarian – don’t follow the herd. Often investors ‘pile-in’ to the markets when there has been a sustained period of growth because they want to enjoy some of those returns, but by that stage much of the upside may have already happened. Better to enter the market when everyone else is selling and prices are depreciated.

Accept market volatility as a buying opportunity, rather than buying overpriced assets that will deliver weak returns. Some of my clients, taking the long-term view, saw the February/March equity selloffs as great time to deploy surplus cash. Always bear in mind though that it is notoriously difficult to time the market. What you may think is the bottom of the curve may go on to test new lows. A second wave of Covid-19 infections, a trade negotiation with the EU and forthcoming US presidential elections could all throw up significant challenges.

Beware holding off an investment until things get ‘back to normal’. Historically, six of the ten best days in the market occur within two weeks of the ten worst days. Since the February/March bear market, many indices have in fact now entered a new bull market. For example, at the time of writing the S&P, 500 (the leading US share index) had recovered to where it was at its previous end of February peak, led by technology stocks such as Facebook, Amazon, Netflix and Google, all of which have benefited from lockdown. Invariably this remarkable recovery has been less widely reported by the mainstream media than the downturn that preceding it.

Finally remember the importance of portfolio diversification. Put simply this means including within your portfolio assets that do not necessarily have a positive correlation. Take for example gold. Typically seen as a ‘safe-haven’ asset, it will tend to increase in value when stock markets decline.

A money manager might include gold in a portfolio as a hedge against falling share prices. The aim is to reduce volatility, particularly important for clients close to, or already in, retirement.

During recent portfolio reviews, some of my more cautious clients were surprised to have seen positive returns over the past six months, given the pandemic. Typically, they were in portfolios with a higher exposure to UK Gilts, US Treasury stocks and other ‘defensive assets’ that often gain when more aggressive assets, such as shares, are being sold.

So, are you ‘bullish’ or ‘bearish’? Risk on or risk off? Let’s hope that the ‘bulls’ are right, and we are at the beginning of a new and prolonged cycle of stock market growth.

KLO Financial Services

This article first appeared in the 5th issue of our Insights Magazine, which you can read by clicking here.

To talk to us about our investment management services, email or call 01926 492406.