Even MY eyes tend to glaze over when discussing investments with my advisers. BUT that doesn’t mean I don’t think we all need to know some of the basics in regards to investing so we can articulate to our advisers where we want to go, and maybe keep our anxiety levels lower in time of flux. We would be made of stone if the volatility of the market didn’t make our hearts race and drive us to make emotional decisions. That’s why we need a basic understanding of market trends, so when our advisers are telling us not to worry, we know if they are right or not!
The stock market follows economic trends, so let’s start with the term “Bull market” because that is the most happy trend – it applies when the market is in an upward trend and average stock prices have increased by 20% or more. Typically a bull market marks a strong economy that is growing. and is usually marked by higher profits and lower unemployment. During this time there is typically strong demand for stocks with a tightening supply as a result of companies being more profitable and thus more valuable, encouraging investors to hold on to their investments.
The term “Bear Market” describes just the opposite. Low employment or a flailing economy that causes a 20% or greater drop in average stock prices are key characteristics of a Bear Market. As companies are less profitable investors are more apt to sell their investment marking a period of higher supply and lower demand.
Note that both Bear and Bull Markets are long term trends and are based on how investors forecast the economy.
Often we will hear about “A Correction”. A Correction is a drop in average market prices of over 10% but less than 20%. A Correction usually lasts a shorter period of time than a bull market. It is inevitable that the market will correct, but it is unpredictable, so we don’t know what trend in the economy will cause the market to correct. Just recently the fear of inflation caused a correction. Prior to that interest rates rising caused a correction. Most of us amateurs should not be concerned with a correction in the market. However, a Correction period may be a good time to buy good, fundamentally sound, investments. It may also be a good time to remind your adviser of what your current goals are to reassess if some of your holdings are still viable vehicles to reach those goals.
Bulls, Bears and Corrections all tell us a general trend of what the economy and the stock market are doing. We understand market price averages through a variety of indices like the DOW or S&P 500. They are a compilation of investments for a certain market or sector of the economy – the Dow is used to follow the broader US economy. So people equate that when the “DOW is up” that the economy is generally doing well.
It’s a lot, right? But having just this basic understanding will help you better articulate to your advisers your risk tolerance and goals. Alright, I’ll let you chew on that for a little bit. As always contact us or comment if you have questions.
We’ll chat again soon!