Bull markets always seem to end the same – slowly at first, then all at once.
My recent discussion on why March 2020 was a “correction” and not a “bear market” sparked much debate over the somewhat arbitrary 20% rule.
“Price is nothing more than a reflection of the ‘psychology’ of market participants. A potential mistake in evaluating ‘bull’ or ‘bear’ markets is using a ‘20% advance or decline’ to distinguish between them.”
Wall Street loves to label stuff. When markets are rising, it’s a “bull market.” Conversely, falling prices are a “bear market.”
Interestingly, while there are some “rules of thumb”for falling prices such as:
- A “correction” gets defined as a decline of more than 10% in the market.
- A “bear market” is a decline of more than 20%.
There are no such definitions for rising prices. Instead, rising prices are always “bullish.”
It’s all a bit arbitrary and rather pointless.
The Reason We Invest
It is essential to understand what a “bull” or “bear” market is as investors.
- A “bull market” is when prices are generally rising over an extended period.
- A “bear market” is when prices are generally falling over an extended period.
Here is another significant definition for you.
Investing is the process of placing “savings” at “risk” with the expectation of a future return greater than the rate of inflation over a given time frame.
Read that again.
Investing is NOT about beating some random benchmark index that requires taking on an excessive amount of capital risk to achieve. Instead, our goal should be to grow our hard-earned savings at a rate sufficient to protect the purchasing power of those savings in the future as “safely” as possible.
As pension funds have found out, counting on 7% annualized returns to make up for a shortfall in savings leaves individuals in a vastly underfunded retirement situation. Moreover, making up lost savings is not the same as increasing savings towards a future required goal.
Nonetheless, when it comes to investing, Bob Farrell’s Rule #10 is the most relevant:
“Bull markets are more fun than bear markets.”
Of this, there is no argument.