Do you want to achieve financial freedom? If yes, then you need to know how to make wise investment decisions in both bull and bear markets.
These terms are usually used when discussing the stock market. But they also apply to other tradable assets, such as currencies, commodities, real estate, and bonds. They describe the general conditions of a market and the sentiments, actions and attitudes of investors.
Bull and bear markets tally with the four phases of an economic cycle: expansion, peak, contraction and trough.
Bull versus Bear markets
A bull market is characterised by aggressive economic growth, rising stock prices, and high investor confidence. An upward market trend reflects the way a bull thrusts its horns up into the air when it attacks an opponent.
Also, a bull can be seen as an investor who is optimistic that an industry is poised to witness growth. He attempts to make a profit by purchasing securities and selling them as prices rise higher.
Bear market, on the other hand, is the direct opposite of bull market. There’s a decline in market prices and many investors try to sell off their securities before it depreciates any further. It often implies economic downturn, inflation, and rising unemployment figures. The name is derived from the way a bear swipes its paw downward at an opponent.
A bear is an investor who believes that the market is going to adopt a downward trend and attempts to profit from it with various techniques, such as short selling.
How to make the most of your investments in a Bear market
Typically, most investors buy securities when prices are rising, and sell before it comes crashing down. But the problem is you may not be able to correctly predict when there could likely be a change in market trends, especially as speculation and psychology play a large role in it. So the big question is: what can you do to avoid losing money?
Most successful investors go along with Rule #1 investing, which Warren Buffet has been known to apply in his dealings. Rule #1 investors act contrary to the public, i.e. they buy in a bearish market, when there is a lot of fear and pessimism, and sell in a bullish market when people are rushing to buy.
The reason this strategy works is you spend less on a purchase, since prices are at an all-time low, and make a lot of profit when they begin to rise. You may ask “what if prices continue to fall?” in that case you can purchase more equity and earn even more profit when the value starts soaring.
To apply this strategy correctly, be sure you follow these tips:
- Diversify your investment: You wouldn’t want to put all your eggs in one basket. Don’t invest too much on a single stock. The best idea is to invest in various big brands known to survive hard economic times. In the case of real estate, you spread you investment across several low cost assets.
- Invest in small proportions, don’t buy all at once: Stage your buys and work your orders to get the best price over time. You want to be able to maximise your profit and reduce your losses by investing in small portions. It is not advisable to buy or sell all at once.
- Do in-depth research: Conduct proper research on all aspects of a company before you buy stock. Buy those that can never be out of demand.
- Stay flexible: Businesses are dynamic, which means that you have to plan for and recognize unexpected shifts in the market.
As a smart investor, you want to take advantage of both Bull and Bear markets. This can be done by finding quality stocks at low prices in bear markets, and selling them when they’ve regained value in bull markets. This strategy is long term and requires you make the right purchase decisions and most of all, that you are able to control your emotions.
This article was contributed by Tobenna Nnabeze.