Some words, like “bear market,” strike panic in the hearts of investors. The term “bull market,” however has the opposite effect. The phrase “correction” often causes confusion. If you’re planning for retirement, these terms may very much on your mind even if you’re not sure what they mean. What do the different market terms mean and how does each impact your retirement plan?
What’s a Bear Market?
The fear when thinking about investing in a bear market is understandable. Bear markets are difficult to predict. They often cause investors to panic, buying high and selling low. The reason? Bear markets are a decline of at least and in excess of 20 percent from the previous Standard & Poor’s 500 index.
A bear market can also be applied to bond and commodity markets. A decline of 20 percent or more sounds bad, doesn’t it? The truth is, however that bear markets happen all of the time. Over the last 80 years, there has been a bear market an average of every three years, each with a decline of approximately 35 percent.
Bear markets make investing more difficult, but should hardly be a surprise or cause for panic.
Are Bull Markets Better?
A bull market, whether it’s in the stock market or the bonds, currencies or commodities markets, is when prices either rise or investors expect them to rise. As with bear markets, a bull market is difficult to predict. Bull markets are often characterized by psychological effects, where optimism, confidence and speculation play a pivotal role.
How Do Corrections Fit In?
A market correction is when there is a pullback of 10-20 percent, rather than the bear’s 20 percent or more. Typically, corrections don’t last as long as bear markets. Still, they often cause, if not panic, a degree of apprehension.
What About My Retirement Portfolio?
An important point to remember is whether the market is experiencing a bear, bull or correction, it’s all happened before. When panic sets in, common sense often flies out the window. It’s true that the market is impossible to consistently predict, but applying backward strategies or buying high, selling low based on fear is exactly the opposite of your investment goals.
There are actions you can take to protect yourself when investing in a bear market. One such strategy is turning toward safe investments, such as upwardly adjusting your percentage of bonds and increasing cash and Treasury bill holdings. Other possible strategies include adding bear market mutual funds to provide short-term relief and shorting stocks with an inverse exchange-traded fund (ETF).
On the other side, a bull market gives you the freedom to take on more risk. Energy, commodity and basic material producers along with consumer discretionary producers all do better in a bull market.
Bull Market, Bear Market and Correction Facts to Remember
Over time, stocks are up more than down. There always have been and always will be bull markets, bear markets and corrections. You can’t base your retirement investment strategies on what’s happening today. It’s the disciplined investment strategy that works over time.