Ask an Adviser: What are bull and bear markets, and what do they mean for investors?

If you hold Australian or international shares, you’ve probably read a lot of headlines about the current ‘bear’ market. So we asked Apt Wealth Partners Chief Investment Officer, Sarah Gonzales, to dig into these terms and what they mean for investors.

What defines a bull or bear market? 

A bull market is essentially one where share prices are on the increase and are expected to continue rising, usually backed by a sound economy and high investor confidence, which in turn, propels growth. Conversely, a bear market, as we are seeing now, is one where prices have fallen a least 20% against the 52-week high. It is often marked by an uncertain economic climate which impacts investor confidence, continuing and exacerbating the downward trend.

What does a bear market mean for investors?

If you use a growth investing strategy (buying shares with a higher PE ratio based on projected future earnings), you will likely see sharper drops in the transition from bull to bear market.

Value stocks will also drop, but usually at a slower rate. As they tend to follow market averages, they will likely bounce back at the same rate as the broader market too.

The critical thing to remember is that your investment strategy should be geared for the long term, and you should be prepared to invest through the cycles. History tells us that when the market starts to recover, it does so quickly and strongly, so if you are invested in quality shares, it’s often a case of simply riding out the downturn.

A bear market, such as the one we are seeing now, can be a good time to invest in quality shares at a lower price. However, it’s essential to ensure any purchases align with your long-term investment strategy and goals.

It can also be a great time to tip a little extra into your superannuation or consider moving some of the cash portion into shares, as your money will go a bit further. Of course, as with any financial decision, it’s best to seek advice on your personal circumstances, time horizon and goals before making any moves.

What to avoid in a bear market

Looking at your portfolio too often

With falls of more than 20% across the board, the numbers on your portfolio may not be looking as healthy as they once did, and this can feel scary. Fixating on and looking at the numbers daily can exacerbate that anxiety. If you have a quality, long-term investment strategy, your portfolio should be designed to weather these storms.

Making panicked moves

In a bear market, all too often, panic can lead to poor decisions. However, selling at the bottom of the market is rarely the right decision. So, keep a clear head and talk to your financial adviser if you need a guiding hand.

Buying shares that don’t meet your investment criteria

It can be easy in a falling market to get caught up looking at ‘inexpensive’ shares that don’t meet your investment criteria. As mentioned above, it can be a great time to expand your portfolio, but sticking to your plan and focusing on quality investments with strong outlooks over the long term is critical.

General Advice warning

The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.