If you’re an investor or follow the markets regularly, you’ll be familiar with the terms “bear” and “bull” markets – financial jargon that can sometimes be intimidating. Often used to refer to economic conditions, the terms describe how the stock market is generally doing and whether they are appreciating or depreciating.

Like a heartbeat, the stock market of any country is volatile throughout, depending on various factors. [The terminology is also used when referring to real estate, currencies, and other commodities.]

Bull Market

The informal term, bull market, refers to a sustained rise in stock prices and is usually driven by high consumer confidence amid low unemployment and strong economic growth.

Since the market’s behavior is impacted and determined by how individuals perceive and react to price changes, eager investors create a buyer’s market as they buy or hold onto securities.

During a bull run, major stock market indices like the S&P 500 rise at least 20% from a recent low and can last for a few months to several years.

When turning to equity markets, a bull market denotes a rise in companies’ share prices, whereby investors often have faith that the uptrend will continue.  Moreover, the selection of stocks is more comforting than that of a bear market.

Bull markets tend to be more frequent, having occurred for 78% over the past 91 years.

Bear Market

A bear market is essentially the opposite of a bull market but specifically refers to an overall stock market drop in value by 20% or more from its recent highs for a sustained period.

If the decline is less than 20%, it is usually not considered a true “bear” market.

While investors’ bullish outlook is powered by economic strength, bear markets often occur during an economic slowdown and high unemployment rates.

Stocks usually drop roughly 36% during bear markets but increase to about 114% during bull markets. More importantly, bear markets, on average, only last for 289 days, while bull markets can run upwards of between 3 and 5 years.

How does a bear market affect your portfolio?

You will typically see low investor confidence in a bear market and a perception that the market is risky.  Some investors will thus be tempted to sell off their investments to eliminate the chances of losing even more invested capital.

However, a bear market is only bad if you plan on selling your stock or need your money immediately, so the best thing an investor can do is stay calm and not overreact.

For the long-term value investor, falling stock prices and depressed markets provide the opportunity to take advantage of the market situation.

It is thus necessary to get your portfolio in order if it appears that a bear market could be around the corner by identifying the relative risks of each holding and diversifying by adding a mix of different assets.

A more effective approach is to regularly add money to the market with a dollar-cost averaging strategy that allows you to invest money continually over time in roughly equal amounts

Conclusion

History has shown that you probably don’t have to wait long for the market to recover.

Therefore, buying stocks with solid fundamentals when prices are depressed is a good investment decision, provided you are in a financial position to endure further possible declines and have the cash on hand to purchase them.