Bear MarketIt is time to address bear markets now that we have given you the run down about its counterpart – bull markets. You won’t see these two aggressive animals strutting down Wall Street anytime soon, but they are two key components of the investment world that go hand-in-hand.

Bear – the opposite of Bull

Bear markets occur when stocks or investments start to lose value and in turn initiates a trend of selling in order to reduce a loss. This trend is also met with a general feeling of pessimism that grows as selling continues. A bear market is only defined when the investment falls more than 20 percent over more than a two month period. Otherwise it could be a short-term trend that doesn’t require drastic measures to be taken.

There are a few different theories about why a bear market was given its name. First, when bears attack their opponents they swing their paws in a downward motion and this is meant to represent the downward swing of the market.  Secondly, the concept of a “bear market” can be traced back to the 18th Century when traders would sell their bear skins in anticipation of prices decreasing.

Factors to Help You Spot It

It can only help you and your investments to know what to be aware of in order to anticipate a possible bear market. Investors keep in mind three factors at all times when considering their finances: global economic concern, national economic data and corporate financial responsibility. Stay up to date on current affairs in these categories in order to detect market possibilities.

Bear markets often occur when the economy is in a state of recession – high unemployment rates can be one factor in determining this. The biggest bear market in U.S. history took place during the Great Depression of the 1930’s.

How to Navigate

1. Wait It Out

It’s common for investors to want to sell their stocks once markets and values start to decrease. However, this should be the opposite. Sometimes it can be more beneficial to hold onto your stocks, wait for the return of the bull market upswing and sell when prices are higher. With patience, you can turn more of a profit than if you panic-sell.

2. Don’t Get Ahead of Yourself

As stated above, sometimes it’s better to wait it out. It is important to not confuse a correction with a bear market. Corrections are short-term downturns – less than two months – that will rebound rather quickly. They often occur after a spike in the market and bring prices and values back to a more realistic level. Once again, don’t get ahead of yourself and start to panic. Evaluate the scene of the market before selling off stocks that lose small values, as it will probably benefit you in the long run to hang on.

It is common for investors to jump between these two markets as stocks fluctuate because in order for the system to work then there has to be people willing to buy (bull market) and people willing to sell (bear market). As long as you stay knowledgeable about what’s happening in the market and what’s happening with your money, your success is imminent. 

Scoulding David Pacey flickr CreativeCommonsLicenseWe hear a lot of “Don’ts” from our parents in our early years. Don’t touch the stove; don’t eat that candy before dinner; don’t run off before telling me where you’re going.

We learn from those experiences. When we don’t listen, and we touch the burner, our hand blisters for two weeks and scars in the shape of Florida; we get sick and miss a soccer game from eating too many tootsie rolls; we feel the brief panic that comes from not being able to find Mom and Dad in a crowded space, when we’re all alone.  From then on, we’re the perfect child…until the next temptation comes along.

But as we get older, we tend not to trust the advice of our tragically uncool elders. College is a free-for-all, and coming out of it, nobody wants to admit that they might need help – especially from dear old Mom and Dad.

It’s time to give it up. You’re probably going to learn very quickly that you, in fact, do not know everything. And when those credit card bills come knocking from the card you opened on a whim and then promptly forgot about, your parents are exactly who you should turn to. Before you let yourself get burnt, swallow that independent-child pride and ask for some much needed help.

Asking for Advice

Now that you understand the basics of investment, stock market specifics and how to admit that you still don’t know everything to you parents, the next step is figuring out what to ask. Focus on three simple questions:

  1. What did you do with your money?
  2. What would you change?
  3. Will you help me save?

These three questions capitalize on the knowledge that your parents already have, which is essential to advice on investments. What they don’t know, a simple Google search or check in on this blog can answer. And what they do can be very helpful to your specific needs and future as a pro-investor.

Obviously, depending on your parent’s financial literacies and experiences, the answers will vary. For some, you might hear about a mutual fund that saved the family back in the ’08 stock crash. For others, you’ll hear of thousand dollar losses that have led to a very conservative portfolio and modest retirement fund. There are lessons to be learned from all, so make sure you listen.

The last question is the most important. For some, “help” can be seen as paying off a mountain of credit card debt in order to improve your credit score and not incurring crazy interest while making payoffs to your parents rather than to a collection company. For others, it can be a tax break while remaining a dependent or an ACA-perk as an insurance beneficiary.  Even so, the answer to this question is not necessarily monetary in value: it can mean more accountability to save rather than spend, or a look at a spreadsheet budget for errors in calculations on student loan principals or grocery trip costs. At the very least, it’s training you to ask for help when you need it, which is an important part of growing up, of investing, and of maintaining your relationship with your mom and dad. An all around win. 

poker chips small

Step 1: Save up

Step 2: Be willing to give up your money for at LEAST 5 years. Do not touch that puppy.

Step 3: Profit                     

Okay, I missed a few steps in between. But if you can get past those first two hurdles – the saving and then the disappearance of that hard-earned money for five years, you’re more than halfway there. Next is the “how” and “why” of choosing which fund is right for you, and there’s a pretty easy formula to follow when it comes to tying up that money so that you can earn the best amount on your investment.

The How’s and Why’s Part 1: Determining Risk, Facilitating Reward

Just like a high-stake poker game versus your online version with fake Bitcoins, the more you’re willing to bet, the higher the pot you’ll stand to gain…but if you fold, you’re looking at a larger loss.

If seeing your portfolio (those things that your mutual funds are kept in) swing up and down with the sway of the market causes you to reach for the Xanax, maybe you’re not quite ready for the risk of a volatile mutual fund. Conversely, if you’ve got the money and time saved up and are looking for a larger reward, a conservative investment might not be right for you. Determining where you fall on the spectrum will point you toward a type of mutual fund that’s the best to fit your needs.

Reward expectations further narrow down your mutual fund suitors by ensuring that what you’re giving is getting what you want in return. Of course, the downside of a mutual fund investment is that it’s never guaranteed. But more often than not, you’ll be receiving your payout in the form you decide on today. For some, that means income supplements needed on a monthly or bi-weekly basis. Quick turnaround on investments can lead there. Maybe you’re saving for retirement (also in a 401(k)) and have more time to slowly stock up the cash in a fund that won’t be touched for quite a while. Again, this is a spectrum, and finding the right spot for you – not too aggressive, or perhaps a tad more conservative – is a crucial step in your fund selection process.

How’s and Why’s Part 2: What Kind of Manager Do You Best Work With?

It sounds like a job interview question, but the standards apply to your fund selection process too. Stepping out into the world of mutual funds and meeting a few people isn’t a terrible idea. You’ll want to find out if you like a manager who is more accessible, one who manages a larger fund or smaller one, whether their past performance is better than your previous manager’s, and if it’s been ranked nationally by syndicated publications like Morningstar (think of Morningstar like Glassdoor but for your money holdings) (Buena Vista Inv.). If the shoe doesn’t fit, move on to the next one. There are plenty to choose from, and your narrowed down options from Part 1 will give you a more specific idea of where to start in the overall process.

It’s also important to remember that your investments are supplying your fund manager with his or her livelihood. The fees incurred will vary between each fund, so look at them closely to make sure you’re getting the most investment bang for your buck. Ask about the Management Expense Ratio (MER) first and foremost, because that’s the number that will tell you exactly how large a percentage of your fund will be going to the manager’s wallet. A typical fee (in front-end or back-end load form) usually varies between 3 to 6 percent of the total amount invested or distributed. Sometimes funds won’t charge a fee at all (no-load funds) but will charge an administration fee or an expense ratio for a variety of services paid out of your pocket to maintain the fund offices or employees.

Lastly, there are 12b-1 fees, which can, according to Investopedia, take as much as .75% of a fund’s average assets per year. Which means that three quarters of a percent of your mutual fund investment can be going straight into the pocket of your advisor. To make sure this doesn’t happen, ask your advisor whether your fund has a 12b-1 fee tacked onto the share price so you know exactly what you’re getting into.

If you don’t find the right fit the first time around, return to steps 1 and 2 until you find someone who can and will help you fit your needs. With so many options out there, it won’t take long for you to find your financial soul mate, and then you can finally get to step three: profit

Courtesy of Marcy Hargan - flickrInvesting is an exciting venture, but also probably a little scary and confusing. There are several aspects that go into investing that you may not fully understand. Numbers, percentages and a slew of words will be thrown around and it’s easy to get lost in the whirlwind.

No worries, we are here to help you navigate the investment scene and break it down for you. For now, let’s focus on bull markets. 

Bull – like the animal?

Exactly. The technical definition for a bull market is when a market’s share prices are rising and therefore encouraging the buying of stocks. A bull market is met with optimism, investor confidence and an expectation for relatively strong and positive results.

The name comes from the animal and how they approach their opponents. When bulls attack they thrust their horns upwards. This is a metaphor for the status and movement of the stock market. In an expected bull market situation it is anticipated that prices will shift upwards much like the horns of an attacking bull.

Helpful Tools

The key component to successfully navigating a bull market is to take advantage of the upward swing of prices as early as possible before the prices get too high. Here are a couple of tools to utilize in order to predict these trends and what to do in preparation for it.

  1. Long Positions

A long position is what you should watch for in order to predict whether or not a bull market could occur. If you think that a bull market situation is about to hit, your best bet is going to be to buy the stock at a lower price and hold onto that stock until you can sell it at a higher price.

One way to approach the situation is to buy the stock and simply hold onto it until you believe the market is topping out and then selling that stock to turn a profit. This is the safest option. If you are looking to increase your profits and be more aggressive among the market, you can consider doing an increasing buy and hold. This means that you purchase the stock at the lower price and still hold onto it, but purchase more shares as the stock market price increases. This way, you are obtaining more shares to sell at a higher price.

  1. Call Option

A call option is an opportunity for you to leverage your capital for a greater return on your investment. It allows you to speculate with stocks that you don’t necessarily own.

What does it mean? If you are anticipating that a price will rise, purchase the call option to a stock by entering into a contract. This will have you paying a set premium price within a certain amount of time. If the stock market price rises over the course of your predetermined time period, you can purchase the shares at the lower price established at the time you enter into the contract. Therefore, you are purchasing the shares at a lower price with the security of being able to turn around and sell them at a higher price. The downfall, however, is that if the stock market does not increase, you will lose out on the amount you paid for the premium.

Call options are a relatively simple and beginner way to go about predicting stock market trends and experimenting with your own investments.

How To Spot a Bull Market

To take full advantage of a bull market situation you want to try to spot it when the market is either topping or bottoming out. Here are two ways to assist you in determining a potential bull market:

  1. Advance/Decline Line

The advance/decline line is created using the following equation: number of advancing stocks divided by the number of declining stocks. If this number is greater than zero then it can be predicted that a bull market may occur. A rising line means that the market is moving higher and it is a relatively safe bet to proceed as if a bull market is about to hit. 

  1. Price Dividend Ratio

This ratio compares stocks’ share price with the dividend paid out in the last year. Another equation: current stock price divided by last year’s dividend payout. If the ratio is declining then it is indicating an attractive bargain and potential bull market.

That is a quick snapshot of a bull market – what it is, what tools to utilize for it, and how to spot it. Bull markets are a good aspect of investing so it’s helpful to stay informed and prepared.