What do the terms ‘bull’ and ‘bear’ markets mean, how can you spot one, and what does that mean for your investment strategy?
Have you ever wondered what the terms bull market and bear market mean? These terms relate to the way those animals behave when they attack. A bear will start out standing tall on its hind legs then swipe down with a sharp paw. Whereas a bull will charge forward, striking upwards with its horns. It’s when prices and values are rising strongly. Or when they are expected to. Investing is about the balance of risk and confidence, after all.
Some investors are optimistic that things will continue to do well. They are said to be feeling bullish. A 20% rise is generally accepted as the sign that you’re in a bull market. It's important to be mindful if you are buying in a bull market to assess if prices are rising faster than values.
The opposite is true of a bear market. If the price of the stocks, shares, and commodities falls by 20% that’s a bear market. Whether you’re in a bull or a bear market it can be a good move to have spread your risks. Investment trusts are structured to do just that. They’re diversified across different companies, asset types and geographies, and can therefore be less risky than a single company stock.
The more diverse your investment portfolio, the more you will have balanced your exposure to potential risks. Plus, they have a revenue reserve so that during the good years when divided returns are plentiful they can set aside some money to pay out to investors in less successful years. That will help you stay on track when markets are going up and down in value.