by Colin Nicholson
Exactly a year ago I explained what a bear market was, one that is generally falling in price. At that time we were in the midst of the worst bear market since the 1970s. Some commentators even compared it to the Great Crash of 1929-32.
Every bear market is followed sooner or later by a bull market. Experts may disagree about when a bull market begins, but most people who have watched the history of stock markets over their lifetime will have heard the term, even if they did not understand it.
A bull market is a period during which the prices of stocks, measured overall by market indexes, generally rises. If any broad market index is charted during that period, it will trace out a pattern that basically begins near the bottom left of the chart and flows towards the top right of the chart. A bull market is also known as an uptrend.
Of course, the prices of individual stocks, or the indexes of stock markets, do not move in a straight line upward. Instead, they will trace out a pattern which may resemble a zigzagging rise or a series of steps and stairs. In other words, there are periods of optimism when prices advance followed by periods of pessimism when prices fall back. The key for a bull market is that each time it rises, it moves above the previous high.
Investors like bull markets because, as well as their stocks paying them dividends, the price rises so that they make a capital gain. This is important because we measure investing using the total return the total of dividends received plus any gain in capital value over the period of the investment.
The secret to taking advantage of bull markets is to buy early and hold stocks through the greater part of the bull market. This is not easy to do because, at the best time to buy, there will be a great sense of fear all around the investor. The best way to deal with this is to remember that we invest based on our expectations for the next few years, not on what is happening now.
Colin Nicholson’s books: Building Wealth in the Stock Market and The Psychology of Investing may be purchased from Colin’s website www.bwts.com.au and good bookstores). Contact Colin at firstname.lastname@example.org or through his web site where you may join the list to receive his free email newsletter.