How to Invest in a Bull Market
Prepare for the next bull market while prices are still falling., Early in a bull market when prices have just started to bounce back from the bottom, consider all kinds of stocks, but look closely at those that have fallen the most during the bear...
Step-by-Step Guide
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Step 1: Prepare for the next bull market while prices are still falling.
Bear markets are invariably followed by bull markets.
While prices are falling, concentrate on raising cash and developing a wish list of stocks (and their target prices).
Bull markets tend to begin abruptly while things appear gloomiest.
Fear, pessimism, and pain prevail.
The end of the world is upon us.
Then suddenly a bull market begins.
Be ready:
Save as much as you can.
Cut down your discretionary spending, and raise as much cash as possible.
Sell bonds and other fixed-income investments so you can take advantage of the high returns of stocks in a bull market.
Sell gold when the Dow-to-gold ratio is well below the historic average of 20:1.
Have plenty of cash deposited in a stock brokerage account, so you can quickly buy stocks once the bulls take over.
Watch for a bull market to begin in the depth of a recession, when everything is still in free-fall and the economic outlook appears the darkest.
If you wait until a recession is "officially" over, you will probably miss a big portion of the bull market's gains. -
Step 2: Early in a bull market when prices have just started to bounce back from the bottom
Lower-quality stocks tend to represent companies with higher debt levels and lower profit margins.
Cyclical stocks are dependent on the business cycle, so they tend to be hardest hit in a recession and can be expected to bounce back dramatically when the recession ends.
Take a long look at stocks that belong to the hardest hit industries and sectors during the bear market.
An example is the financial sector in 2008 and
1991. , If small-cap stocks have fallen more than large-cap stocks, buy small-caps.
If international stocks have fallen more than domestic stocks, buy international stocks.
If value stocks have fallen more than growth stocks, buy value stocks.
During the early phase of a bull market, only forward-looking investors with long-term horizons believe things will get better and are willing to take new positions.
As the outlook turns just a little less depressing, the market will start to move up from the bargain hunting. , Hold on to your positions as the bull market develops, transitioning from early- to mid-phase.
During the mid-phase of a bull market, the economic outlook may remain poor, but it will gradually seem less poor.
Investors will begin to realize that improvement is taking place, and they will bid stocks up to their fair values.
Fear of a "double dip" will continue to keep prices in check for a while, and a sizable number of investors will remain skeptical of the rally.
The mid-phase is usually the longest phase of a bull market and can last for many years.
As long as skepticism in the market's recovery remains, the bull market will continue to rise slowly.
That's the time to hold on tight to your positions. , Begin to sell lower-quality stocks to make room for higher-quality ones.
As the bull market matures, risk increases along with asset prices.
The hardest hit stocks tend to recover a lot more than higher-quality ones.
Lower-quality stocks may go up by 300% to 400% while higher-quality stocks are rising only 50% to 100%.
As stock prices go up, however, risk increases, so you should dial down risk by concentrating on high-quality companies. , At this point, euphoria sets in, and essentially all remaining bears turns bullish.
As everyone is cheered by the improvement in the economic and corporate results, they will become willing to extrapolate it.
Expressions like "new era"
"new paradigm"
"permanently high plateau"
and "end of the business cycle" will be rampant.
Paradoxically, future price-to-earnings ratios may be low, based on overly optimistic projections for the next 12-month earnings. (Trailing P/E and P/E based on averaged earnings over the past 3, 5 or 10 years are always high, usually above 20, toward the late phase of the bull market.) Regret and greed become powerful forces, as the masses become jealous of the profits made by investors who were early, and they want in. , Sell your lower-quality and cyclical stocks if you still have some.
Long-term investors should hold on to high-quality, defensive (consistently dependable) stocks. , Hold off buying when the overall stock market has become "irrationally exuberant," to borrow a phrase.
Remember that the next bear market is just around the corner. -
Step 3: consider all kinds of stocks
-
Step 4: but look closely at those that have fallen the most during the bear market
-
Step 5: typically the lower-quality
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Step 6: cyclical stocks (such as Alcoa and Dow Chemicals).
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Step 7: Focus on the hardest hit investment styles.
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Step 8: Keep buying stocks.
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Step 9: As the bull market continues to rise during the mid-phase
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Step 10: shift your focus more to high-quality stocks.
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Step 11: Know that when everyone finally concludes that things will get better forever
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Step 12: the bull market has now transitioned from mid- to late-phase.
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Step 13: Sell when everyone wants to buy.
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Step 14: Raise cash and get ready for the end of the bull market so you can buy again during the next bear market.
Detailed Guide
Bear markets are invariably followed by bull markets.
While prices are falling, concentrate on raising cash and developing a wish list of stocks (and their target prices).
Bull markets tend to begin abruptly while things appear gloomiest.
Fear, pessimism, and pain prevail.
The end of the world is upon us.
Then suddenly a bull market begins.
Be ready:
Save as much as you can.
Cut down your discretionary spending, and raise as much cash as possible.
Sell bonds and other fixed-income investments so you can take advantage of the high returns of stocks in a bull market.
Sell gold when the Dow-to-gold ratio is well below the historic average of 20:1.
Have plenty of cash deposited in a stock brokerage account, so you can quickly buy stocks once the bulls take over.
Watch for a bull market to begin in the depth of a recession, when everything is still in free-fall and the economic outlook appears the darkest.
If you wait until a recession is "officially" over, you will probably miss a big portion of the bull market's gains.
Lower-quality stocks tend to represent companies with higher debt levels and lower profit margins.
Cyclical stocks are dependent on the business cycle, so they tend to be hardest hit in a recession and can be expected to bounce back dramatically when the recession ends.
Take a long look at stocks that belong to the hardest hit industries and sectors during the bear market.
An example is the financial sector in 2008 and
1991. , If small-cap stocks have fallen more than large-cap stocks, buy small-caps.
If international stocks have fallen more than domestic stocks, buy international stocks.
If value stocks have fallen more than growth stocks, buy value stocks.
During the early phase of a bull market, only forward-looking investors with long-term horizons believe things will get better and are willing to take new positions.
As the outlook turns just a little less depressing, the market will start to move up from the bargain hunting. , Hold on to your positions as the bull market develops, transitioning from early- to mid-phase.
During the mid-phase of a bull market, the economic outlook may remain poor, but it will gradually seem less poor.
Investors will begin to realize that improvement is taking place, and they will bid stocks up to their fair values.
Fear of a "double dip" will continue to keep prices in check for a while, and a sizable number of investors will remain skeptical of the rally.
The mid-phase is usually the longest phase of a bull market and can last for many years.
As long as skepticism in the market's recovery remains, the bull market will continue to rise slowly.
That's the time to hold on tight to your positions. , Begin to sell lower-quality stocks to make room for higher-quality ones.
As the bull market matures, risk increases along with asset prices.
The hardest hit stocks tend to recover a lot more than higher-quality ones.
Lower-quality stocks may go up by 300% to 400% while higher-quality stocks are rising only 50% to 100%.
As stock prices go up, however, risk increases, so you should dial down risk by concentrating on high-quality companies. , At this point, euphoria sets in, and essentially all remaining bears turns bullish.
As everyone is cheered by the improvement in the economic and corporate results, they will become willing to extrapolate it.
Expressions like "new era"
"new paradigm"
"permanently high plateau"
and "end of the business cycle" will be rampant.
Paradoxically, future price-to-earnings ratios may be low, based on overly optimistic projections for the next 12-month earnings. (Trailing P/E and P/E based on averaged earnings over the past 3, 5 or 10 years are always high, usually above 20, toward the late phase of the bull market.) Regret and greed become powerful forces, as the masses become jealous of the profits made by investors who were early, and they want in. , Sell your lower-quality and cyclical stocks if you still have some.
Long-term investors should hold on to high-quality, defensive (consistently dependable) stocks. , Hold off buying when the overall stock market has become "irrationally exuberant," to borrow a phrase.
Remember that the next bear market is just around the corner.
About the Author
Helen Freeman
A passionate writer with expertise in cooking topics. Loves sharing practical knowledge.
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