When investing in the stock market for the first time, you’ll more than likely hear of two types of market – bear and bull. A bear market is one that is typically heading downwards, with negative activity and poor forecasting. The contrasting bull market is one that is heading upwards, with positive forecasts likely. The natural reaction to have with a negative bear market is not to invest, while in a bull market the reaction would be to follow the crowd and pour your money in. However, this mentality is paradoxically illogical, and this article will explain why.
One of the most spectacular bull market booms and busts in history was the growing Dotcom Bubble during the late nineties, followed by its spectacular crash from March 2000 to October 2002, in which some $5 trillion was removed from the value of technology stocks and shares. What ostensibly happened in this instance was an overwhelming speculative sentiment about the potential of the Internet, with hundreds of companies sprouting up with similar business plans and securing investment. Venture capitalists saw the rise of these shares, and were keen to get in on the action quickly, bypassing normal constraints and caution, while also increasing the value of stocks even further. As more and more people jumped on the technology bandwagon, the prices skyrocketed until eventually the bubble burst, destroying the value of many people’s investments.
The Dotcom Bubble is a classic example of when bull market sentiment gets completely carried away. Prices rose, more and more people jumped on the bandwagon, which sent prices higher, and then prices collapsed. When times start getting good, and you see other people making a fortune, it’s easy to be seduced by soaring prices. However, just imagine you invested in the NASDAQ around its March 2000 peak of 5000 points. Within nearly two weeks you would have stood to lose 9% of your investment, while within a year you would have seen it lose its value by some 50%.
The thing to learn about bull markets is that it’s difficult to know when it will run out of steam. The key is not to go with the flow of the market and invest during times of rising prices. If you were to buy on a rise, then sell when the market begins to fall, you would be following the illogical investment policy of buy high, sell low, which puts you in stead to lose money. Instead of this strategy, watching intently on booming markets and waiting for the moment they run out of steam and begin to fall is a better strategy. When stocks become overpriced, as tech stocks did in the Dotcom Bubble, they will inevitably burst, but buying in the aftermath of a collapse could lead to securing a bargain. Buying during ‘bear market’ periods is therefore a more likely way of finding a buy low sell high strategy.
If you’re looking to invest, the current bear market in stocks indicates a good time to buy. Warren Buffet, the world’s richest man largely due to his investment strategy, has said there’s never been a better time to buy US stocks, while in the UK, the FTSE 100 is only worth 60% of what it was this time last year. If you’re looking to find out more on investments, then take a look at Legal and General.