Understanding bear and bull markets
It can be helpful to know what happens when stock prices rise and fall and how to think about investing through it all.
April 14, 2022
In a perfect world, we’d all buy investments when prices are low and sell them when they’re high. But it’s impossible to predict the best days to buy or sell an investment.
That’s why trying to “time the market” isn’t a very effective investing strategy. Instead, focusing on the length of time our investments are in the market can be more useful.
Stocks, bulls, and bears…Oh my!
Ever heard these funny terms that refer to big trends in the market?
A bull market is a period of time when stock prices are rising. A bear market is the exact opposite—it’s a period of time when stock prices are falling.
Quick tip: Find it tricky to remember which one’s which? Think of this—when faced with a predator, a bear will swat down with its paws (falling stock prices), but a bull will thrust up with its horns (rising stock prices).
Bull and bear markets are also usually related to the conditions of the broader economy, not just the stock market. So alongside a bull market, we may see businesses booming, companies hiring, and investors feeling optimistic.
During a bear market, on the other hand, the economy might hit a rough patch—unemployment may rise, profits may be slim, and investors might feel doubtful about market conditions.
How long do they last?
Historically, bull markets have lasted longer than bear markets. The average bull market lasts about 2.7 years, the average bear market lasts about 10 months.
That means stock prices overall have gone up for longer than they’ve gone down. But still, the declines can be sharp and hard to predict.
So if I can’t predict the market, when do I invest?
Some investors would say: “Always!” (Well, not always, but at least consistently.)
One strategy that long-term investors use to avoid trying to time the market is called “dollar-cost averaging.”
What’s dollar-cost averaging?
Dollar-cost averaging is a strategy where you invest a set amount of money in the same stock or fund over a period of time. This helps you invest at various prices, instead of trying to choose “the right day” to invest a larger amount.
The easiest way to apply dollar-cost averaging is to set up recurring investments. That way you don’t have to remember to log in to your app and invest, and you’re not tempted to try to time the market.