Alexander Grace Chartered Financial Planner

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Bull Markets and Bear Markets – what does this mean?

Bulls and bears, both animals that you wouldn’t wish to encounter on an autumn walk, however, when we refer to these two animals in financial markets, they have very contrasting definitions. In times of volatility, such as what we have experienced in 2022, more attention tends to be given to these terms.

Why are they called “Bull” and “Bear” Markets

There is no definitive explanation for this, but one of the most accepted reasons is from the nature in which each animal attacks – a bull will thrust their horns upwards, whilst a bear will swipe their paws down. The term is a metaphor, mimicking the actions of both animals; when markets are on the up, it’s a bull market and when markets are heading down, it’s a bear market.

How are both they defined in financial terms?

In mainstream media, when we refer to bull and bear markets, it is usually in relation to major indices such as the FTSE 100 or S&P 500, however, we will focus on the FTSE All Share for the remainder of this blog as this gives a more holistic representation of the UK market.

There is no exact definition for what constitutes a bull or bear market, but a 20% swing in either direction is generally accepted.

Historically, bull markets tend to be for much longer periods than bear markets, with the average period since 1945 to 2020 being 5.8 years against 1.1 years respectively. In total, this means that 63.7 years over the same period have been bull markets whilst only 11.3 years have been bear markets.

Like the animals they’re named after, bear markets are louder than bull markets. Naturally, bear markets cause a lot of uncertainty and anxiety, especially when everything we see in the media is very doom and gloom. However, for many investors, we reflect on those initial conversations, highlighting the importance of the long-term nature of investing and not to make any rash decisions in the events of markets falling. As tempting as it may be to cash in during the low points of the market, this may not be the best course of action as it would be realising a loss and although potentially protecting the money from further losses, there is also no benefit if markets were to bounce back.

As with any investment, the general concept is “buy low sell high”, although when dealing with intangible investments such as stocks, sometimes the basic principles are ignored.

What factors should I consider in either event?

  • Diversification – being able to diversify your investment across different sectors, geographical regions and assets will help to balance the risk within a portfolio and ensure that it is not too reliant on the performance of any one sector or location.
  • Rebalancing – stocks within portfolios all perform at different levels and it is possible for high performing stocks to unbalance the portfolio, therefore regular reviews to ensure this is maintained will help.
  • Reviewing your investment timeline – objectives change for investors as time moves on, a basic example being many retirement plans start off with higher risk assets and they are gradually shifted to lower risk assets as they get closer to retirement. Reviewing your objectives against your financial position will help to ensure that your money is invested in the right place, and you aren’t taking unnecessary risks.
  • Term – this has already been mentioned, but it is such an important part of investing. Realistically, when you choose to invest, you have a term in mind with the idea of allowing for the peaks and troughs of the market to provide a real return on your capital. Should you be three years into an investment that you plan to leave in place for ten years, this allows you time to leave the investment in place to ride out any bear markets and recover.

What can you do?

We understand that this is a difficult time for many investors given the current economic climate and being able to speak with a Financial Planner can be very valuable in helping you make important financial decisions.

The information available through Alexander Grace is for your general information. In particular, the information does not constitute any form of advice or recommendation and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be taken before making any such decision. Past performance is not necessarily a guide to future performance. The value of investments may go down as well as up and you may not get back the money you originally invested.

Past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate at the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Figures obtained via Vanguard to 31st December 2020.

Alexander Grace, a trading name of IWP Financial Planning Limited, is authorised and regulated by the Financial Conduct Authority. Financial Services Register No 441359. IWP Financial Planning Limited registered in England and Wales company registration number: 4138186.

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