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Summary
- Bull and bear phases are integral part of any stock market.
- While bull markets are synonymous with gains in stock prices, bear markets represent a phase of losses and value destruction.
- There are different definitions for both bull and bear markets, but the most popular is the 20% upmove or the 20% down move rule.
Bull and bear phases are integral part of any stock market. While bull markets are synonymous with gains in stock prices, bear markets represent a phase of losses and value destruction. Even as there are different definitions for both bull and bear markets, the most popular being the 20% upmove or the 20% down move rule.
It generally happens because most investors remain for long time in a market. However, the critical question is how an investor can adjust his investment portfolio to a bear or a bull market.
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Here are three things to focus on in a bear or a bull market, which may help investors adjust to changes in market sentiment. Even a small investor can benefit from making some tweaks to his portfolio allocations.
Investors must expect volatility
It is not possible to have a stock market with zero volatility. Expecting markets to trade without any volatility in the long run is a far-fetched thought. Markets have historically moved in cycles. Thus, investors must always expect volatility.
A few ups and downs don't define a bull or a bear market. According to experts, investors must wait for two weeks or so to notice stock surges or declines to get an idea of the kind of the market they have entered.
Adjustment to be made for a bull market
In a bull market, investors seek to take increased risks than they would have otherwise. Sectors such as energy, consumer discretionary and commodities producers tend to do well when the economy is growing. Investors can look towards various sector exchange traded funds (ETFs) in a bull rally. ETF, which tracks an index of equities in emerging markets, also provides a good option.
Similarly, high-yield bonds and high-yielding real estate investment trusts (REITs) offer good bets to investors.
Experts also advise investors to not be in a hurry to sell stocks to book profits during the early bull run. You can hold on to the profits for as long as possible to earn good returns.
However, you must be extra vigilant while doing so. Experts also advise investors to focus on mid-caps in early and middle stages of the bull market. They may shift to blue chips in later stages.
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Adjustment to be made for a bear market
Since market loses confidence during a bear run, investors can move to safe havens to protect their investment portfolio. Bonds can help to lower your losses in such a scenario since they are less likely to lose money compared to equities. Also, bonds provide regular interest income. Thus, you can adjust the percentage of bonds in the portfolio upward.
Blue chips are other good options since they are less volatile by nature. In addition, you earn income via dividends. There are a few mutual funds designed to offer higher returns during the stock market’s decline.
Holding on to defensive stocks is also a good strategy since they will anyway see buying interest in the middle of cyclical correction in stock prices. You can also make the best of hedges through futures and options.
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