A Spotter's Guide to Bull Corrections and Bear Markets | Morgan Stanley (2024)

FAQs

Is it smarter to buy stock during a bull or bear market Why? ›

Is it better to invest in a bull market or a bear market? In general, bull markets are a better time to invest. Yes, stock prices are higher, but it's an overall less risky time to invest. You'll have a greater chance of selling assets for a higher value than when you bought them.

Take a short-selling position. Going short in bearish times is one of the most common bear market strategies among traders. As a trader, you'll short-sell when you expect a market's price will fall. If you predict this correctly and the market you're trading on does decline in value, you'll make a profit.

Bull markets are characterized by a sustained rise in stock prices, typically by 20% or more, underpinned by strong economic growth and high investor confidence. Bear markets, conversely, are marked by sustained declines in stock prices, often triggered by economic downturns and reduced investor confidence.

Mistake 1: Cashing in and avoiding volatility

Exiting the market during a period of volatility could be detrimental because you are: Selling during a loss—it becomes a realised loss when you finalise your sale. Don't do this. Forgo your chance of participating in future market rebounds.

With stock indexes at all-time highs, it seems we are in the midst of a new bull market. While much of the market's recent gains have come from a handful of stocks, the rally has begun to broaden in recent months. Expectations of an earnings rebound in 2024 suggest earnings could continue to drive the market higher.

However, if you retire at the top of a bull market, and don't change your risk profile, you might get screwed. The day you retire will be about as good as it gets. If you retire at the bottom of a bear market, even if you change your risk profile to be conservative, your financial days will likely only get better.

However, a general rule of thumb suggested by U.S. Bank is that your cash or cash equivalents should range from 2% to 10% of your portfolio, although the right answer for you still depends on your circ*mstances.

Investing in bonds is also a common strategy to protect oneself during a bear market. Bond prices often move inversely to stock prices, and if stocks decline, a bond investor could stand to benefit. Short-term bonds in a bear market could help investors weather the (hopefully) short-term downturn.

Bonds also are an attractive investment during shaky periods in the stock market because their prices often move in the opposite direction of stock prices. Bonds are an essential component of any portfolio, but adding additional high-quality, short-term bonds to your portfolio may help ease the pain of a bear market.

The longest bear market lingered for three years, from 1946 to 1949. Taking the past 12 bear markets into consideration, the average length of a bear market is about 14 months. How bad has the average bear been? The shallowest bear market loss took place in 1990, when the S&P 500 lost around 20%.

How long do bull markets typically last? ›

3. How long the average bull market lasts. As much as investors would like the answer to this question to be "forever," bull markets tend to run for just under four years. The average bull market duration, since 1932, is 3.8 years, according to market research firm InvesTech Research.

They use the second definition for a bull market, in which stocks have to rise past their old high. As of Friday, by both measures, the S&P 500 is in the midst of a bull market.

You should consider adopting a portfolio rebalancing strategy—even during down markets when it's tempting to let your “winners” keep growing while your “losers” are taking their lumps. That's because rebalancing helps you buy low and sell high—an investing adage that's easy to say and hard to do.

Bear markets are often associated with declines in an overall market or index like the S&P 500, but individual securities or commodities can also be considered to be in a bear market if they experience a decline of 20% or more over a sustained period of time, typically two months or more.

The bottom line

When a bear strikes, you can see share prices falling hard and market values getting lower. Mentally, this may trigger your sense to "buy low," which is generally a smart thing to do.

That depends on how soon you'll need the money you've invested. Government bonds and defensive stocks historically perform better during a bear market. However, most people investing for the long term shouldn't be aggressively tweaking portfolios every time there is a sell-off.

Long-term investors can find many valuable stocks at lower prices during a bear market, making bear markets a good time to buy if you can afford to wait to see your investments rebound. Traders looking to make a short-term profit may need to use other strategies during a bear market, such as short selling.

A dip in the market can be a great opportunity to purchase stocks and other assets at lower prices. As the market recovers, you will hopefully see higher market gains on these new investments.