Investing in a Bull Market vs. a Bear Market

Investors have come a long way in the last decade-plus.

Since the lows of 2009 – when the S&P 500 bottomed out at 666 – the market is to-date up more than 300%, putting its 10-year trailing return of 15% in the 94th percentile since 1880, according to Goldman Sachs. The typical 10-year trailing return is closer to 9%.

Truth is, we’re in the middle of the longest bull run of all time, eclipsing the massive run during the 1990s tech boom as well as the post-WWII economic build-up that took place in the U.S. through the 1950s.

But there are still headwinds.

Per CNN: “While this bull market is in the record books for durability, it’s hardly the most powerful. On an annualized basis, the S&P 500 has gained 16.5% since March 2009. That’s a bit below the average of 22% since 1932, according to S&P Dow Jones Indices. The S&P 500’s 324% advance during the bull market is the second-most, behind only the 417% surge during the 1990-2000 run.”

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What is a Bull Market?

A bull market is a market that’s appreciating steadily without experiencing extended periods of pullback or losses. It’s simple: when stocks are rising over the long-term, we’re in a bull market.

The terminology is a little dated, but think of it like a bull racing through the streets. Nothing is going to stop it. It’s going to keep moving seemingly forever.

According to the Motley Fool, one widely accepted definition for a bull market is a 20% rise in prices over a set amount of time. But that’s not all…

“There are several things that tend to accompany a bull market,” the site writes. “For starters, bull markets generally happen during time periods when the economy is strong or strengthening. There will often be strong GDP growth and falling unemployment, and companies’ profits will be on the rise. Additionally, one of the best non-numerical indicators is rising investor confidence. During a bull market, there is a strong overall demand for stocks, and the general “tone” of market commentary tends to be positive.”

What is a Bear Market?

On the flipside, we have the so-called bear market. A bear market is everything a bull market is not. It is an extended period during which asset prices fall, typically 20% or more, and usually comes with a lot of investor fear, widespread pessimism about the future of the market and an overall exodus of investment capital from the market.

The last extended bear market ended in 2009 when the S&P dropped more than 35% and bottomed out at 666. The gains since then have been the new bull market.

However, bear markets can be short-term events as well. We saw the major U.S. markets calls into a temporary bear market in December 2018, though the losses were quickly earned back and the ongoing bull market continued.

How to Invest in a Bull and Bear Market

When it comes to investing in different market conditions like bull and bear markets, there are a number of different strategies that investors have used over the decades to try and maximize their returns. But success or failure really comes down to personal preference and risk tolerance.

Here’s how to set yourself up for success in any market.

Diversify your portfolio

Think beyond the traditional options of stocks, bonds, and cash to include alternative investments and other asset classes in your portfolio. These types of non-correlated assets can help protect your portfolio in the event of a downturn in the market, while keeping you invested in a bull run. But remember, diversification requires … diversity. Investing in only one alternative strategy may help with portfolio diversification, but it takes more than one to make a real difference. In fact, focusing solely on one alternative asset can also concentrate risks.

Go against the herd

As Warren Buffett famously said, “be fearful when others are greedy, and greedy when others are fearful.” In short, don’t follow what everyone else is doing. This is particularly powerful advice during an extended downturn or bear market. When sentiment is going against the market and everyone is selling their assets, smart investors know that it’s a great time to swoop in and purchase those assets at low prices. On the flipside, at the height of a bull market when sentiment is very strong, everyone wants to buy in. That drives prices up into the stratosphere, forcing investors to pay far too much for their assets. Holding off until a dip is often the best strategy.

Look at alternative investments

According to Blackrock, alternatives are “investments in assets other than stocks, bonds and cash, or investments using strategies that go beyond traditional methods, such as long/short or arbitrage strategies. Since alternatives tend to behave differently than typical stock and bond investments, adding them to a portfolio may provide broader diversification, reduce risk and enhance returns.”

Alternative investments are important for investors who want to grow their investment returns in any market while simultaneously protecting their portfolios. The list of alternative investments can be long, including just about any investable asset, such as: Hedge funds, private equity funds, commodities, real estate, collectibles (such as art and antiques), venture capital, and more.

And these assets can be quite powerful. Yale University famously committed a large portion of its endowment to alternative investments, particularly focused on private equity holdings, in the 1980s, and has to-date seen impressive results. In 2014, for instance, it saw returns greater than 20% from this approach.

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