Editor's Note: This story originally appeared on NewRetirement.
In the world of finance, bull markets are often discussed with enthusiasm and anticipation. Investors, traders, and analysts eagerly monitor the rise of stock prices, economic indicators, and positive market sentiment.
But what exactly is a bull market? In this article, we’ll provide a concise introduction to bull markets, exploring their characteristics and what investors need to know to navigate these periods of market optimism.
So, let’s delve into the world of bull markets and gain a deeper understanding of their significance in the realm of investing.
What Is a Bull Market?
Traditionally defined, a bull market is when the stock market has achieved a 20% gain over the most recent low.
The question is: Will it hold? Is this a good measure of a bull market? And, what does it mean for retirement investing?
A more conservative definition of a bull market
Another definition of a bull market is one endorsed by Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices. He helps maintain and produce no less than both the S&P 500 and the Dow Jones Industrial Average.
Silverblatt believes that a bull market should be defined as when the markets exceed previous highs.
After all, even at a 20% gain, you may still be well below your own previous valuation.
Characteristics of a bull market
Key characteristics of a bull market include:
- Rising Prices: The primary feature of a bull market is the consistent upward movement of prices across a broad range of assets. Stocks, in particular, tend to experience significant gains, with major stock market indices reaching new all-time highs.
- Investor Optimism: Bull markets are fueled by optimism and positive sentiment among investors. They believe that the economy is strong, corporate profits are growing, and market conditions are favorable for continued upward movement.
- Increased Participation: Bull markets often attract new investors and increased trading activity. Retail investors, institutional investors, and even speculators are drawn to the market, seeking to capitalize on the upward trend and profit from potential gains.
- Economic Expansion: Bull markets typically occur during periods of economic growth. Positive macroeconomic indicators, such as low unemployment rates, robust GDP growth, and rising consumer confidence, contribute to the overall optimism in the market.
IMPORTANT: Bull market designations have nothing to do with future performance
No matter how you define a bull market, it is important to remember that you can only designate a bull or bear market by analyzing the past. The designation of a bull market is only about past performance; it does not predict the future.
While upward momentum is a thing, it is not a reliable predictor of the future.
You can be reasonably confident (bullish) on the long-term prospects of the markets. However, it is wise to remain cautious (bearish) in the short term.
How to Prepare for a Bull Market
It actually doesn’t matter what direction the economy is headed. The following steps should be taken no matter if we are in a bull or bear market.
These strategies will help safeguard your finances and mitigate the potential impacts of an economic downturn or financial shock while enabling healthy growth.
Have a long-term investment strategy
A long-term investment strategy involves understanding your goals, time horizons, and risk tolerance. These factors will drive your asset allocation — what percentage of your money should be invested in different types of assets.
Ideally, you will understand how your strategy will evolve over time.
Maintain a well-diversified investment portfolio across different asset classes, sectors, and geographic regions.
Diversification helps mitigate risk and reduce exposure to any single investment.
Maintain adequate liquid assets
Part of your assets should be held in cash or in an investment vehicle that can be easily cashed out and that is not subject to market fluctuations.
This is so that you don’t have to chance selling investments at a loss in an emergency.
Depending on your age, income sources, and overall asset allocation, you should have an emergency fund that can enable you to cover your living expenses for three months to five years.
Learn more about emergency savings and how much you should have.
Know your target asset allocation and when to rebalance
In bull and bear markets, you want to be ready to rebalance your portfolio in order to maintain your target asset allocations.
Rebalancing is the process of adjusting the asset allocation of an investment portfolio to bring it back in line with the desired target allocation. It involves buying or selling assets within the portfolio to restore the original or revised target weights of each asset class.
For example, let’s say you have a simple target asset allocation of 70% stocks and 30% bonds. After a period of favorable stock market performance, the percentages you are holding may shift.
In a bull market, your portfolio may become more heavily weighted toward stocks. In this case, you would want to sell some stocks and use that money to buy bonds to again achieve your targeted asset allocation.
Rebalancing is typically done periodically, such as annually or semi-annually, or when specific thresholds are crossed. It helps maintain the desired risk level, ensures diversification, and prevents the portfolio from becoming overly concentrated in any one asset class.
Continue to invest on a regular basis
Successful investing does not require that you only buy at the absolute lows and sell at the absolute highs.
For most people, a better approach is to invest at regular intervals and buy no matter what is happening with the market.
Manage optimistic exuberance and overly conservative fears
Humans are emotional beings. Our emotions can trigger irrational financial behavior. Therefore, it is useful to understand our emotional tendencies.
During a bull market, there is often a surge in positive market sentiment, and it can be tempting to become overly optimistic about future market returns.
However, excessive optimism can lead to irrational investment decisions, such as chasing high-flying stocks or taking on excessive risk without proper analysis.
This behavior can result in overexposure to certain assets or sectors, increasing vulnerability to potential market downturns.
On the other end of the spectrum, fear and panic can lead to overly conservative behavior, causing investors to miss out on potential opportunities for growth.
When investors become excessively fearful, they may be inclined to sell their investments prematurely, missing out on potential long-term gains. It’s important to maintain a balanced perspective and not let fear dictate investment decisions.
Maintain a long-term financial plan
Bull markets can create the illusion that market trends will continue indefinitely.
However, it’s essential to maintain a long-term perspective and remember that market cycles include both periods of growth and periods of decline.
By avoiding emotional reactions to short-term market fluctuations, investors can focus on their long-term investment goals and avoid making impulsive decisions based on temporary market conditions.
The NewRetirement Planner puts the power of planning into your own hands. You can set goals and set a path to achieving the future you want, stress test your projections, and stay on track.