Stock market investors usually talk about two types of markets: bull markets and bear markets. Simply put, during bull markets, stock prices are on the rise and investors are optimistic that they will continue that way. During bear markets, stock prices have fallen for a period of time, and investors expect the trend of decreasing prices to continue. Investors are considered to be "bullish" or "bearish" about individual stocks or industries based on whether they think the price activity will be upward or downward. People typical think of making profits in bull markets and losing money in bear markets, but the truth is, smart investors can make a profit in either type of market.
More specifically, a bear market can be identified when a 20 percent decrease occurs in the major indexes (like Nasdaq, Dow Jones or Standard and Poor 500), and the drop persists for several quarters. The danger for an investor really lies more in responding in the wrong way than in the falling prices themselves. Over time, the stock market rises and falls on a regular basis. And losses only really occur when an investor cashes out of the market at a price lower than the original stock purchase price. This often happens when an investor panics at the first signs of a bear market and decides to cut his losses by selling. If it turns out that the downturn was temporary, and not really a bear market after all, the investor has indeed lost money that he would have had if he had not sold low.
The most conservative approach to insuring against losses in a bear market is to include a mixture of stocks and bonds in your portfolio. Bonds typically do better in bear markets than stocks, so a mix that includes more bonds than stocks is theoretically considered to whether bear markets. The trade off, though, is that is you have a portfolio that is heavy with bonds, you sacrifice the profits that stocks make during bull markets. For that reason, it is really important to be clear about your investment goals when you decide on your portfolio mix.
As a general rule, people who have 10 or more years before needing the fruits of their investment portfolio can have a higher percentage of stocks, since they have time to absorb and recover from more market fluctuations. But people who may need their portfolio's resources sooner should weight it more toward bonds.
Author and entrepreneur Bernz Jayma P. is the owner of a financial blog dedicated to helping people expand their knowledge on personal finance. You may visit his blog at www.Invesmint.com.
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