Bull vs. bear market: What's the difference?

Anyone who follows financial news even casually is bound to hear the phrases "bull" and "bear" to describe the stock market. If you're a little foggy on the difference between a bull vs. bear market, here's a breakdown of this industry jargon and investing tips during times of market volatility.

In very general terms, a bull market means things are going well for investors—stock prices are rising. A bear market is when stock values are heading down.

While media analysts sometimes use these descriptors loosely, they have precise meanings. It's like using the word "recession" any time the economy hits a rough patch even though it's not necessarily a full-blown widespread economic downturn lasting multiple years. So what are bull and bear markets in exact terms?

A bull market is defined by The Securities and Exchange Commission as two or more months where a broad stock index rises in value by at least 20%. A "bullish run" is characterized by an overall feeling of optimism about the market. And that, in turn, is usually accompanied by a rosy view of how the economy will perform for the foreseeable future.

A bear market is when the stock market as a whole drops in value by at least 20% over the same length of time. That typically happens when pessimism about stock-market performance snowballs. Investors begin to worry that a fall in prices will continue, so they sell their shares—which, of course, leads to a further drop in value.

In order for a bull or bear market to occur, these price movements have to occur across a large swath of the stock market. That's why a broad index is used to measure the 20% threshold. The S&P 500, which consists of the 500 largest publicly-traded companies in the U.S., is one such metric. Because of the number of stocks that it represents, its performance is a fairly reliable indicator of the market as a whole.

It's important to realize that not every Wall Street downturn has earned the "bear market" label, much like the overuse of the term "recession." Keep in mind that bear markets and recessions don’t necessarily align—a recession can occur in the middle of a bull market and a bear market can occur outside of an economic expansion. Sometimes after a period of achieving gains, stocks will go through a "correction," which is a decline of 10% to 20%. But that doesn't qualify it as a bear market—a descent of 20% over at least two months.

Some bear and bull markets are more pronounced than others, but neither trend can go on forever. When stocks are favorable for an extended period of time, for example, investors eventually reach a point where share values start to look overpriced—demand for shares then recedes, bringing prices back down again.

Meanwhile, no matter how pessimistic investors are during a bear market, prices eventually fall to a point where they start to look like a good deal again. More than a few savvy traders have made enormous profits by purchasing shares when they're "on sale" and waiting for them to rebound.

Bull markets tend to happen much more frequently than bear markets and last quite a bit longer. According to a recent analysis by Forbes, bull markets have taken place in 78% of the past 91 years. On average, they last 973 days or nearly three years.

Typically, bull markets occur when consumer confidence is high and unemployment is relatively low—that is, people feel good about spending money on goods and services, leading to strong business earnings. The longest bull market in U.S. history came fairly recently, from 2009 to 2020. During that stretch, the stock market soared more than 400%.

In contrast, a bear market happens once every 5.4 years on average. So while they're somewhat infrequent, you're likely to experience several of them throughout your life.

Typically, a feeling of optimism sets up a bull market, and bear markets are the result of worries over the economy. There's no doubt that when investors see their retirement accounts and other investments tank over a short period of time, it can be scary. But the good news is that since the Great Depression, bear markets have gotten a lot shorter.

Certainly, not all bear markets end quickly. But over the past several decades, it's taken an average of only two years for stocks to climb back to their previous peak. For a long-term investor, that should be a comforting thought. Dips in asset prices are almost certain to occur from time to time, but history suggests that they probably won't last all that long moving forward.

Even for relatively poised investors, watching the stock market rack up losses over multiple weeks or months can be a heart-wrenching experience. But it's worth keeping in mind that a sound financial plan takes these inevitable blips into account. If you have the right asset mix for your age and financial goals, you'll likely be prepared for those slumps.

Here are five tips to help get you get through the next bear market:

Markets are notoriously difficult to predict. But when looking at historical data, certain patterns emerge. Among them: bear markets typically only last for a matter of months or a couple of years.

If you're a younger investor, you probably don't need to worry about your retirement balance falling temporarily because you're decades away from actually selling your shares. The market is likely to endure several dips before you leave the workforce. But past performance suggests that these dips will be more the exception than the rule. Historically, the stock market has garnered average yearly returns of roughly 10%. Therefore, equities still represent one of the best opportunities for long-term growth.

For those with a shorter time horizon—including adults at or near retirement age—the prospect of bear markets provides a different takeaway. They're a reminder to gradually adjust your portfolio toward more conservative investments like high-quality bonds and money market funds that tend to be less volatile.

The same concept applies to younger individuals who may need to tap their investments in, say, five to 10 years. That category includes adults saving for a down payment on a house or putting away money for their child's college expenses. Since you have less time to ride out a Wall Street downturn, you might consider leaning less heavily on stocks in favor of more stable asset classes.

Learn more about reevaluating your risk tolerance over time

Humans are emotional creatures. So when we confront a stock market that's losing value, we want to jump ship before things get even worse. The fact is, though, that selling your shares when things are at a low ebb may be one of the worst moves you can make.

One of the basic axioms of investing is "buy low and sell high." If you liquidate your stock holdings in a bear market, you're doing the opposite. In the investment world, bad times don't last forever. Unless you desperately need cash, you may be better off waiting things out.

If anything, a down market may be a time to acquire more shares because they're selling at a discount.

Extreme market fluctuations—good and bad—have a way of throwing portfolios off their rhythm. So during periods of increased volatility, it's all the more important to rebalance your assets according to your investment objectives.

Suppose that you have a target asset mix of 70% stocks and 30% bonds and it's a bear market where stocks have lost significantly more value than fixed-income assets. Suddenly, your portfolio is comprised of 60% stocks and 40% bonds. In order to get back to your target mix, you'll have to sell some of your bond holdings and use the proceeds to purchase more stocks.

Dollar-cost averaging is one of the simplest and most effective ways to boost your investment balance. The idea is remarkably simple: You contribute a set dollar amount every week or every month regardless of market conditions. Depending on your goals and your budget, for instance, you may decide to put $200 every month into an individual retirement account (IRA).

The beauty of dollar-cost averaging is that your same $200 will actually allow you to purchase more stock or mutual fund shares when the market is in a slump because they're priced lower. If Index Fund XYZ was selling at $50 a share before the bear market but is now valued at $40, you could buy five shares instead of four. And—in the hopes that your mutual fund may recover with the rest of the market—when the fund goes back up to $50 a share, your $200 investment would be worth $250.

As long as you're investing for the long haul, a downturn of several months or even a couple of years isn't necessarily going to hurt you. If you practice dollar-cost averaging, you're actually benefiting every time you put money into your account and buy when shares are on sale.