- Bullish vs. Bearish Investors: Which Are You?
- Are You a Bull?
- Or Are You a Bear?
- Bull Market vs. Bear Market
- Origin of the Terms “Bull” and “Bear”
- Investing in a Bear Market
- Bottom Line
- Accumulate More Wealth With An Investing Game Plan
- How To Create An Investing Game Plan
- Step 1: Figure Out Your Liquidity Need
- Step 2: Assess Your Current Position
- Step 3: Reaffirm Your Investment Horizon
- Step 4: Divide Your Excess Capital Into Multiple Tranches
- Step 5: Create A Capital Deployment Plan
- Follow Your Investing Game Plan
- Watch Your Wealth Grow
- Wealth-Building Recommendation
- Will the Stock Market Crash Again in 2021?
- What Is a Stock Market Crash?
- Previous Stock Market Crashes: Examples From History
- What Causes a Stock Market Crash?
- How Did the Coronavirus Crash Affect the Stock Market?
- Is the Stock Market Going to Crash in 2021?
- Reasons to Feel Cautious About the Stock Market in 2021:
- Reasons to Feel Optimistic About the Stock Market in 2021:
- What to Do During a Stock Market Crash
- 1. Refuse to panic
- 2. Go into conserve mode
- 3. Follow the proven plan
- 4. If you’re investing, stay invested
- 5. Meet with an investment professional
- Remain Calm During a Stock Market Crash
Bullish vs. Bearish Investors: Which Are You?
After the March 2020 stock market crash brought on by the COVID-19 pandemic, the U.S. stock market saw immense gains. However, a recent NASDAQ correction and growth stock sell-off has made many investors think twice about continuing to add to the already high-priced growth sector of the market.
Others viewed the correction as a good time to buy and expect stock prices to continue going up in 2021. This present-day, real-world situation is a great example of bullish vs. bearish investors.
At a basic level, those who reacted to the correction by buying more while stocks are the bullish ones because they expect the stock value to keep trending upwards. Meanwhile, those who stayed the market during that time or sold off their stocks are the bearish investors.
Are You a Bull?
What does being bullish mean? If you have either a long or short-term positive sentiment towards equity, an index or the overall stock market, you can be considered a bullish investor. For example, if you’re bullish on Amazon because their earnings went up in the last quarter, that means you would expect Amazon’s stock value to go up and might even buy more shares.
Even if you don’t think the stock market will do well, you can be bullish in other areas. For example, you may be bullish on gold because you anticipate the stock market will dip and inflation will rise in the coming years, making gold desirable as a store of value.
The term bullish has also commonly been used to talk about the stock itself. A stock can be bullish if the sentiment towards it is generally positive or if it has been rising in value for a period of time. A stock can typically become bullish due to news, deals or increased earnings. You’ll sometimes hear the phrase “making bullish moves” when referring to a stock that has been climbing.
Or Are You a Bear?
Certainly, we’re not thinking of the animal here. In investing terms, you’re a bear if you think the value of either the total market, specific equities or certain sectors will fall. In short, it’s the opposite of being bullish. those who are bullish on stocks or equities, you can be equally bearish on just one stock or one security, such as a company Amazon or equity gold.
If many people are bearish on equity, it can cause its value to drop. The opposite happens, of course, when many people are bullish on one stock.
When investors are extremely bearish on a stock, they might short sell the stock, meaning they will borrow shares of stock to sell in hopes of buying it back later at a lower price. In the case of company bankruptcy, they will never have to buy it back. However, this is only recommended for the most experienced of investors as the potential losses here are infinite.
Bull Market vs. Bear Market
As with investors and stocks, a market can also be bullish or bearish. A bull market is generally defined as a period of consistent, overall upticks in the market, whereas a bear market is when the prices of the overall market fall.
The most commonly accepted metric for determining a bear market is a 20% fall from a recent peak, but there is no universal or official measurement for a bull market. However, a common assumption is a 20% rise in the prices of the stock market.
For the past decade or so, the U.S. stock market has been described as being an amazing bull market that’s paralleled the expansion of the U.S. economy.
However, economic expansion isn’t necessarily a prerequisite for a bull market or a recession for there to be a bear market.
Bear and bull markets can be cyclical, not always lasting for years at a time, and can actually be mere weeks or months in length.
A bear market is also not to be confused with a correction. A correction is typically much shorter in duration and often a smaller dip, such as the recent 10% NASDAQ correction. These corrections also generally affect smaller sections of the market.
Origin of the Terms “Bull” and “Bear”
It is said that the term “bear” came first in investing and “bull” came afterward to act as a counter.
Regardless of which one came first, the terms bull and bear came to be from the two ways the respective animals attack.
A bull will charge forward and rear its horns up while a bear will swipe its paw down — attack directions that are parallel to investors’ anticipation of the market direction.
There are quite a few other interpretations too. Researchers have had theories ranging from 18th-century bearskin trading to bull- and bear-baiting.
People who start investing during bull markets can fall victim to the fear of missing out on stock buys that were hyped by the news. Always use rational, factual judgment and not emotions when investing. Invest safely and regularly with enough diversification in your assets.
Investing in a Bear Market
Most often, if your timeline for investing is long in that you won’t need the money for many years, it hurts more to stay the market than to intelligently invest. There are quite a few reliable ways you can still invest and make money in the market when there is a clear bear market:
- Most ly, not all the sectors are in a free fall. There are typically still some stocks or sectors that are on the rise. If not, there are ly at least some holding steady and still paying dividends to shareholders.
- Use the dollar-cost averaging strategy instead of putting in a lump sum all at once. With DCA, you can put in smaller amounts of money at regular intervals. This makes sure your cost of investing averages out over time since some of your money will go into the market at peaks and some will go in at dips instead. As a result, you don’t have to risk all of your investable money at once while the market continues a downward trend. In fact, this is a sensible way to invest in a bull market as well.
- If you understand options investing, buy short and long-term puts to hedge against falls. Puts give you the right to sell your stock at a set price at the time of purchase. If the stock goes down from the time you buy a put, you would still be able to sell at the price you set earlier.
- Invest in gold, silver, bonds or even cryptocurrencies instead. Find an asset, outside of stock, that you trust and that is still rising, staying steady or is a good store of value. It is sometimes the case that bond yields rise when the stock market is falling.
Regardless of whether you are a bull or a bear and whether the market is going up or down, always invest facts and numbers, do thorough research and have a plan before you invest. If you need help with financial planning, consult a financial advisor, even if it is during a remarkable bull market.
Accumulate More Wealth With An Investing Game Plan
Having an investing game plan is important if you want to accumulate more wealth. With an investing game plan, you will stress less and execute winning financial movs more often.
Violent stock market corrections of 10% or more happen almost every year. Sometimes, we’ll see a whopping 30%+ decline we did in March 2020.
Doing nothing is considered one investing game plan. But doing nothing because you couldn’t be bothered to think about how scenarios might play out is lazy. It’s better to be lucky, than good. However, what if you’re neither?
Since writing the post, Stock Market Meltdown Implications For Everyone, many of you have asked for specific advice on how to deploy your capital into the markets. Given everybody’s financial situation is different, I’m just going to suggest a five step framework, and use myself as an example.
I’ve lost a ton of money in the markets before, having invested during the Asian financial crisis of 1997, the dotcom bubble of 2000, and the economic collapse of 2008-2009.
What has helped me get through difficult investing periods is simply coming up with an investing game plan to account for different scenarios. The fear of investing gets minimized, and rational action takes over.
How To Create An Investing Game Plan
Here are five steps to creating an investing game plan to help you good times and and times. It is during good times when we need an investing game plan the most. Because once the bad times hit, we will be prepared.
Step 1: Figure Out Your Liquidity Need
I currently need at least $30,000 in the bank to feel secure. Any more than $30,000 feels I’m wasting opportunity to invest somewhere since money market accounts pay almost nothing.
Any less in the bank, and I start to feel uncomfortable just in case a financial catastrophe happens.
My liquidity need has fluctuated between $10,000 – $100,000 in the past mainly due to job security and upcoming expenses.
Once you figure out your minimum cash need, you can implement an investing game plan with the money above your minimum. A good minimum liquidity benchmark is six to twelve months worth of living expenses.
You can currently get a pretty good online savings rate with CIT Bank to park your money. The other way is buying 3-month treasury bonds.
Step 2: Assess Your Current Position
my neutral view on the stock market at the time, as a new year’s goal,I accumulated $70,000 over my $30,000 minimum liquidity need. My current overall stock / bond allocation is roughly 70% / 30%.
Meanwhile, my public market investing portfolio (as opposed to private equity and venture debt) makes up roughly 21% of my overall net worth. My comfortable net worth allocation range in public markets is 20% – 30%.
Figure out how much money you are willing to invest beyond your minimum liquidity need. Analyze your current equities / fixed income split. And calculate what your total public market investment exposure is to your net worth and adjust accordingly.
Check out the proper asset allocation of stocks and bonds by age to help with your investing game plan. At least from a public asset portfolio perspective, my post should help.
Step 3: Reaffirm Your Investment Horizon
My investment horizon is 22 years, or age 60 for both pre-tax and post-tax investment accounts.
The idea is to match the minimum age at which I’m able to withdraw money from my 401k, SEP-IRA, and Solo 401k accounts penalty free with my after tax investments.
The hope is to never need the money due to existing cash flow from other income streams. But one never knows and I will reassess when the time comes.
Any time horizon longer than 10 years should help investors become more disciplined. I’ve found that if your investing time horizon is less than three years, you become either much more risk averse or too risk loving. With your main investment portfolio, it’s wiser to shoot for singles and doubles.
The longer you can stretch your time horizon, the less concerned you will be about market meltdowns. Reaffirm your investment horizon. If you have young children, then you can really stretch your investment horizon by decades.
For example, my wife and I are regularly contributing the maximum gift tax exclusion amount per year in our children’s 529 plans. We’re fine if the market sells off because our investment horizon for the 529 plans is over 15 years.
Step 4: Divide Your Excess Capital Into Multiple Tranches
If you had unlimited ammunition to buy, you’ll eventually be able to pick the bottom. This is one of the basic goals behind Dollar Cost Averaging. Once every two weeks or month, deploy a certain percentage of your disposable income into an investing portfolio in hopes of buying some shares at lower prices.
But if the stock market is collapsing by 5%, 10%, 20%+ in short periods of time, you might as well become more aggressive in your Dollar Cost Averaging approach if you have a long investing time horizon. This is where you should consider creating at least three super tranches to purchase securities with the capital beyond your minimum liquidity need.
I’ve been investing $5,000 – $20,000 a month in the market since leaving Corporate America in 2012. The $70,000 in extra capital is divided into five tranches of between $10,000 – $15,000 each to deploy into the market. This capital is in addition to the monthly $5,000 – $20,000 deployments.
Step 5: Create A Capital Deployment Plan
Armed with five tranches of up to $15,000, I plan to deploy each tranche after every 2% or greater downward move. I use 2% or greater downward moves as a signal for excess capital because major indices generally move up or down by only 0.5% the majority of days.
Furthermore, with five opportunities to buy at -2% or greater, I’m making an implicit assumption that I think with a high probability the stock market will correct by at most 10% and then flat-line or begin to recover again.
If the S&P 500 only corrects by 1% or less, then I will not be deploying extra capital. I’ll simply continue my normal $5K – $20K a month dollar cost averaging plan and sit on excess capital until better opportunities arise. If the S&P 500 corrects between 1-2%, then it’s a judgement call. Maybe I’ll invest just $3,000 in extra capital.
Let’s say the S&P 500 corrects by 5% to 1,900 from 2,000. I’m still allocating a maximum of $15,000. If the S&P 500 recovers all its losses the next day, and then loses 5% again back to 1,900, I’m not investing another tranche. Instead, I’m waiting for another 2% correction from the 1,900 level to 1,862 or lower before deploying more capital.
So far, I’ve deployed $40,000 of the excess $70,000 capital into this 10% – 15% correction. I didn’t expect to invest the money so quickly, but I’m just following my system. As you will note, the market corrected beyond my expected 10% correction at one point. By having five separate tranches to invest, I’ve saved myself some ammunition if the stock market corrects even further.
Nobody can accurately predict the future. But we know over the long term, the stock market moves up and to the right. Therefore, it’s strategically a good move to keep on investing for as long as possible.
Follow Your Investing Game Plan
Your investing game plan must include how much to invest in what type of investment over a certain period of time. That, or when a stock or particular index sells off by a certain amount.
Where I’ve blown myself up is when I’ve gotten too cavalier with my investments. For example, in my younger years, I might have deployed all $70,000 during the initial 3% correction and have nothing left to buy during the subsequent 9% – 12% correction. The system keeps me disciplined, and your system will as well because it reduces emotion.
I’m a big believer in investing in growth stocks when you are younger. However, once you are over 40 and/or have a sizable capital base, investing in growth stocks when valuations are at all-time highs becomes more risky. Hence, it may be better to invest in dividend stocks for passive income or real estate.
The most important thing every long term investors should do is come up with an investing game plan today and stick with it over the long run.
If you keep on investing on a regular basis, the amount of money you can accumulate over a 5, 10, 20+ year period will be enormous. It’s the undisciplined who wake up years later wondering where all their money went.
Watch Your Wealth Grow
Created in 2012 by following a game plan. Fixed Income actually contains a bunch of equity structured notes.
By investing $5,000 – $20,000 a month since June 2012, a brand new portfolio I created at the time is now over $500,000 three years later. I call it my “Unemployment Fund.
” The idea was to see how much I could grow a portfolio from scratch with no job, just my passive income streams, and an online business that generated less than $100,000 a year in revenue at the time.
I encouraged a personal finance client to join me in creating a new Unemployment Fund of her own in 2012 because she wanted to eventually leave her soul-sucking job as well.
We motivated each other, and her portfolio is now over $300,000 while earning less than $150,000 a year. By accumulating this amount, she got the courage to engineer her layoff in 1H2015 and become a rockstar freelancer instead!
Losing money in the stock market feels terrible. But if you come up with a tailored investing game plan and stick to it, you’ll be able to drastically minimize the anxiety of stock market investing. Your portfolio will ly grow larger than if you didn’t have a plan and you’ll have a much greater appreciation for money as a result.
Track Your Net Worth Easily For Free. In order to optimize your finances, you’ve first got to track your finances. I recommend signing up for Personal Capital’s free financial tools so you can track your net worth.
The tool will also help you analyze your investment portfolios for excessive fees. Finally, run your financials through their amazing Retirement Planning Calculator.
Those who come up with an investing game plan build much greater wealth over the longer term than those who don’t!
Is your retirement on track? Here’s my personal results.
Will the Stock Market Crash Again in 2021?
Let’s pretend we’ve got a time machine to take us back to March of 2020 when the coronavirus was officially declared a pandemic (don’t worry, we won’t stay long).
While people were binge-watching Tiger King or swarming the supermarkets to buy toilet paper, the global economy was in upheaval. Supply chains ground to a halt. Entire industries shut down overnight.
And the stock market crashed—big time.
If you were checking your 401(k) during those days, you probably felt panicked as you watched your savings disappear. And even though the markets regained all of the ground they’d lost by the end of 2020, there’s a lot of worry and speculation out there about 2021.
I want you to be informed about what’s going on, but at the end of the day, worry will only cause harm, not good. In the middle of chaos, we must focus on what we can control: our attitude, our outlook and our actions.
So, will we see another stock market crash in 2021? Let’s take a look at some of the major factors to better understand where we’re headed.
What Is a Stock Market Crash?
A stock market crash is a sudden and significant drop in the value of stocks, which causes investors to sell their shares quickly. When the value of stocks goes down, so does their price—and the end result is that people could lose a lot of the money they invested.
Be confident about your retirement. Find an investing pro in your area today.
To get an overall measure of the value of stocks, we look at indexes the Dow Jones Industrial Average (DJIA), the S&P 500 and the Nasdaq. If you look at the visual representation of one of these indexes, you can see why we use the term crash. It’s watching a plane take a nose dive.
Previous Stock Market Crashes: Examples From History
Throughout history, the market has gone through many extreme ups and downs. When we look back, we’re reminded that, yes, a market crash is a very difficult thing to go through, but it’s something we can and will overcome.
- The Great Depression (1929): Over the course of a few days, the DJIA dropped 24.8%.1 It took a little over a decade for the economy to get back to predepression levels. Industry from World War II helped get things back up and running.
- The Stock Market Crash of 1987: The market lost 22.6% of its value in one day known as Black Monday.2 But within two years, it had recovered everything it had lost.3
- September 11, 2001: Terrorist attacks in our country caused a major nose dive in the market, but it corrected itself quickly. Just two months later, the stock market had returned to September 10 levels.4
- The Great Recession of 2008: The DJIA lost about 50% of its value in a very short time.5 However, after a couple of years, the market was stronger than ever before—we were essentially in a bull market (a period of significant economic growth) from 2009 to just before the coronavirus crash.
- The Coronavirus Crash: In March of 2020, the COVID-19 pandemic triggered the most rapid global crash in financial history. However, the stock market regained ground relatively quickly and the year closed with record highs in all major indexes.
So, keep your head up. Chances are, you’ve already lived through two major crashes and recessions. It’s part of the rhythm of life!
What Causes a Stock Market Crash?
A stock market crash is caused by two things: a dramatic drop in stock prices and panic. Here’s how it works. Stocks are small shares of a company, and investors who buy them make a profit when the value of their stock goes up.
The value (and therefore the price) of those stocks is how well investors believe the company will perform.
So, if they think the company they’re invested in is headed for hard times, they sell that stock in an attempt to get out before the value drops entirely.
The reality is, panic has just as big of a role in a stock market crash as the actual economic factors that cause it.
Let me give you a recent example from the coronavirus pandemic that shows you how powerful panic is. As news of the virus spread, grocery and convenience stores all across the world sold toilet paper in a matter of days.
Was there a toilet paper shortage? Well, yes and no. There wasn’t a shortage before people started panicking.
But when people lost their minds and started stocking up on toilet paper, their actions created a shortage!
The same kind of panic can trigger a stock market crash. Once investors see other investors selling off their stocks, they get nervous. Then, stock values start to dip, and more investors sell their shares. Next thing you know, everyone is dumping their stocks, and the market is in a full-fledged crash.
My point is this: The stock market’s value is entirely perception and prediction of the future. No wonder it feels a roller-coaster ride!
How Did the Coronavirus Crash Affect the Stock Market?
So, back in the early days of the pandemic, the stock market took us all on a ride. Global markets (not just here in the U.S.) took a huge plunge, triggering a short-lived bear market (where the stock market falls by at least 20%) and an economic recession in the following months.
But after the initial nose dive in March, the market began to inch its way back to recovery. And by the time the ball dropped on December 31, 2020, the stock market had regained all of its lost ground, and then some! Did you catch that? All of the major indexes (which help measure different sectors of the market) grew in 2020:6
- The S&P 500 gained 15.6%.
- The Nasdaq gained 43.7%.
- The Dow Jones gained 6.6%.
We still have a long road ahead of us in 2021, but looking back, we can see that even the big, scary coronavirus crash didn’t knock us off course for long.
Is the Stock Market Going to Crash in 2021?
We need to establish one important fact: No one can accurately predict whether or not the stock market is going to crash in 2021. Just think back to everything that happened last year—you can’t make this stuff up!
All we can do is evaluate which indicators will influence the market and your investments in the coming year. The good news is that, overall, major financial analysts are predicting steady growth of the bull market in 2021.7 But let’s look at the specifics.
Reasons to Feel Cautious About the Stock Market in 2021:
- COVID-19: The coronavirus isn’t going anywhere, and new strains are developing.
- Unemployment: Although we’ve added millions of jobs since the country was hit hard in 2020, we’re still experiencing significant unemployment numbers.9
- Inflation: Those stimulus checks come at a cost.
With increased government spending, we’ll probably see an increase in inflation, which could lead to investors pulling back.
Reasons to Feel Optimistic About the Stock Market in 2021:
- Vaccinations: As more people are vaccinated for the coronavirus, we’ll see an increase in optimism, movement and spending.
There’s a lot of pent-up energy in our country, and people are ready to get out and about!
- Old industries reopening: As the world continues to reopen, we’ll see certain businesses gain value in their stocks again (think oil, travel and entertainment).
- New industries growing: Specific industries—tech, e-commerce and biotech—gained tons of ground during the pandemic and will continue to grow and give investors reason to feel confident.
- Low interest rates: The Federal Reserve has promised to keep interest rates near zero, which will encourage spending.11
We can run numbers and make predictions all day long, but ultimately, we have no idea what’s going to happen in 2021. Let’s be the kind of people who are prepared for anything the future has in store!
What to Do During a Stock Market Crash
If the market crashes again in 2021, remind yourself that you lived through another crash just last year. Of course, a crash is scary. Yes, you’ll have to make some adjustments. But with the right plan to move forward, we can and will continue to make progress. Here are five ways you can respond to a stock market crash:
1. Refuse to panic
As we talked about before, panic can make the crash just as bad as the actual economic hurdles we’re facing. Don’t fall for it. Dealing with the unknown creates uncertainty, and uncertainty left unchecked can become fear. Choose to stay clear and positive with your thoughts.
2. Go into conserve mode
You can’t control how Congress makes their budget, but you can control how you make your budget! If the economy goes under, it means it’s time to cut out all unnecessary spending of any type.
Cancel your gym membership, and don’t even think about having an online shopping spree! Meal plan to save money. Use up the food that you have in your pantry and freezer before you go out and buy more.
Focus on funding the Four Walls before anything else:
Protect yourself and your family. Tighten the budget and hang in there. This won’t last forever.
3. Follow the proven plan
Rain or shine, the Baby Steps don’t change. They’re the proven plan for managing your money, and they work! You need to understand which step you’re on and then work the plan.
If your income isn’t guaranteed and there’s another crash, you might need to make some adjustments. Pause paying extra toward debt right now but keep your “focus forward” mindset. Save up extra money to fund your emergency fund, and when the tough time passes—and it will pass eventually—then you can start back up and pay extra on your debt.
4. If you’re investing, stay invested
The most basic principle of investing is to buy low and sell high. When stock prices dip low in a crash, I want you to think of it as buying on sale! Don’t try to time the market. Focus on time in the market.
If you’re on Baby Step 4, keep investing 15% of your income (unless you need to pause temporarily due to unstable income).
Lots of people are tempted to cash out their 401(k) or mutual funds when the market takes a nose dive before they “lose any more money.” But if you pull out now, you guarantee a loss.
Stay plugged in and ride it out to give your investments more time to grow and recover.
5. Meet with an investment professional
When there are big shifts in the market, schedule a call with your investment professional.
You need specific advice for your situation—your age, your funds, the types of retirement accounts you have, and which Baby Step you’re on. Ask your pro if you need to make any adjustments in response to the crash.
Don’t be afraid to share what’s on your mind. If you’re married, make sure your spouse is on the call! Make a plan for how you’ll move forward together.
And by the way, if you’ve been playing the investment game solo, I encourage you to connect with an investment professional!
Remain Calm During a Stock Market Crash
Choose to be patient and think long term. No matter what 2021 has in store, I want to remind you of the things that we know! We know that we care about our families, our dreams and our futures. We’ll all do a much better job of that if we stay positive and focus on the factors that we can control. We’ll get through this year together.