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Bull Market vs Bear Market [Two Investing Strategies for Each] - YouTube
Channel: Let's Talk Money! with Joseph Hogue, CFA
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I’ve got four investing strategies to take
advantage of any stock market.
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In this video, we’ll look at the history
of bull and bear markets as well as what has
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caused stocks to crash over the last 50 years.
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I’ll then reveal two investing strategies
you can use for each type of market.
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We’re talking bull markets versus bear markets
today on Let’s Talk Money!
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Beat debt.
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Make money.
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Make your money work for you.
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Creating the financial future you deserve.
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Let's Talk Money!
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Hey Bowtie Nation, Joseph Hogue with the Let’s
Talk Money channel.
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A special shout-out to all you in the nation,
thank you for spending a part of your day
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here.
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If you’re not part of the community yet,
just click that little red subscribe button.
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It’s free and you’ll never miss an episode.
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Every time the stock market starts wobbling
like it has lately, the news fills up with
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talk about bull markets and bear markets.
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Now it’s important to know the difference
between a bull vs bear market and I’ve got
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some great strategies for investing in each
but the truth is sometimes all the news just
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leads to people making the worst investing
decisions.
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Investors see those headlines about a bear
market right around the corner and they rush
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out to panic sell or some hack on TV screams
bull market and investors rush out to buy
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a certain stock.
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It’s why the average investor earned an
average of just 2.6% annually in the decade
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through 2013 according to researcher Dalbar
and that’s versus an average return of over
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7% on stocks.
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It’s those knee-jerk investing decisions
and that’s what I want to save you from
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with this video.
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We’ll cover a quick definition of bull market
and bear and look at the history of each in
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the stock market.
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We’ll look at the average returns and losses
in each market, how long they last and what’s
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caused bear markets in the past.
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I’m then going to show you four investing
strategies you can use to maximize your returns
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in each market.
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You’ll be able to use these strategies to
not only protect your money in a bear market
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but boost your returns in either.
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So the technical definitions of these two
types of markets aren’t great.
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A bull market is just when stock prices are
increasing over more than a few months.
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A bear market is any drop of 20% or more from
the most recent high in a stock or the market
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as a whole.
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So you can have a bull or a bear market in
the overall stock market or an individual
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stock.
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But what’s more important here is the investor
sentiment in each, investor’s sense of excitement
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in a bull market and the sense of panic in
a bear.
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That’s really what drives prices in the
market and what’s going to signal those
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investing strategies we’ll talk about.
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So let’s look first at this data by Mackenzie
Investments on a composite S&P and TSX index,
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so this is data on US and Canadian stock markets.
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We’ll look at some bear markets going back
to the 1930s but I like to use the broader
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data back only to 1956 for a more modern perspective
on the markets.
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There have been 12 bull markets since ’56
though there’s some argument whether the
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2001 gain was a real bull market or just a
quick bounce in the 2000 crash.
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On average, stocks have jumped 129% from the
low of the previous bear market and have rallied
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for 54 months.
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Now on that last point, it does seem like
bull markets are lasting longer than they
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have in the past.
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Five of the last seven bull markets have all
been over that 54-month average so the number
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could be skewed a little low by older data.
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There have also been 12 bear markets of a
20% drop or more since 1956 with stocks falling
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an average of 28% and for that plunge in prices
lasting an average of nine months from the
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previous highs.
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Now it’s said that history doesn’t repeat
itself but it does tend to rhyme.
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That means while no two bear market causes
will be the same, there are some common themes
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that cause stocks to plunge.
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So looking at some of the causes of bear markets
in the past, we can get a sense for warning
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signs of a future stock market crash.
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We don’t need to go too far back, just looking
at the causes of stock crashes over the last
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60 years gives us a good idea of those common
causes.
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So starting with the crash of ’56 we saw
the economy booming in the post-war years
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and this is where the saying that the Federal
Reserve stops the party by taking away the
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punch bowl.
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Fed Chair Martin previewed higher rates in
a 1955 speech and fears over a recession were
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aggravated by the Suez Canal crisis and the
Soviet’s invasion of Hungary.
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So this one was the Federal Reserve increasing
the cost of borrowing and geopolitical risks
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threatening to push the world into war.
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The stock crashes in ’61 and ’66 don’t
even register on some bear market charts because
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they were so quick.
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The 1961 crash was the original flash crash
with stocks falling 6% on a single day and
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for no reason.
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Interest rates were rising for most of the
decade but nothing really set off these two
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mini-crashes.
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It wasn’t until 1969 that the U.S. saw another
major crash and this is probably one of the
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most under-studied bear markets.
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The late ‘60s were the most chaotic in U.S.
history with an escalation in Vietnam, racial
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tensions and the assassinations of Robert
Kennedy and Martin Luther King Jr.
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The recession here wasn’t so bad but it
followed a huge runup in stock prices so all
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the political uncertainty, rising inflation
and interest rates, it all came together for
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a 36% drop in the S&P 500 from late ’68
through May 1970.
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Runaway inflation started the bear market
of ’73 when Nixon announced relaxing price
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controls.
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Consumer prices jumped 21% in just two years
so not only did real consumer spending fall
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off a cliff but you had twin fears of recession
and interest rates.
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Now a lot of pundits want to blame the ’81
crash on the Federal Reserve, and it’s true
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that Chair Volcker raised rates as high as
20% to offset double-digit inflation that
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year.
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But this is also one of the first stock market
crashes in modern history that was really
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about high stock prices.
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Shares surged 288% in just the seven years
and just got way ahead of valuations.
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The stock market crash in October 1987 is
maybe the most famous with a one-day loss
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of 23% on the Dow Jones.
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It was actually pretty brief, with the bear
market only lasting three months, and blamed
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on the surge in computerized trading that
went haywire when stock prices started to
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plunge.
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Iraq’s invasion of Kuwait is considered
the match that lit the 1990 recession though
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this was really a borderline crash.
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Oil prices more than doubled during the war
so people were worried about inflation and
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consumer spending.
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The currency crisis in the late 90s was also
more of a hiccup in the dot-com bubble and
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even with a 27% drop mid-year, stocks still
finished ’98 with almost a 30% gain.
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It wasn’t until the Fed started raising
rates in ’99 that the market took its cue
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and prices plunged 49% starting in March 2000.
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Besides the fear that higher interest rates
would cause a recession, this one was really
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about valuations.
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Tech stocks were trading on pure adrenaline
and had jumped almost 900% during the decade.
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Finally before we get to those bull and bear
market investing strategies, most investors
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remember the big crash of 2008.
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After cutting rates to just 1% in 2003, the
housing market exploded and the loan market
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started creating signs of a bubble.
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The Federal Reserve raised rates 17 times
through June 2006 to cool down the pace.
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The problem here was that not only did higher
rates slow down the economy, they also uncovered
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a huge problem in the mortgage market.
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People were getting loans on no docs and no
jobs and with rates that reset after a few
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years.
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When these loan rates jumped and it became
clear that borrowers could in no way make
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payments, the bubble burst and led to the
worst crash since the depression.
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So looking at these past bear markets, we
see some common causes that we can use to
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signal a stock market crash or a recession.
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One of the most frequent causes or at least
parallel changes is the Fed raising interest
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rates.
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Now I don’t want to put the blame solely
on the Fed here.
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They’re public servants trying to manage
full employment, so a strong economy, but
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at the same time stable prices, so low inflation.
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That means raising rates when the economy
overheats and decreasing rates to jumpstart
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it.
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But the fact is that increasing interest rates
do slowdown the economy and can lead to a
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recession.
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If it’s on the back of booming stock prices
then a lot of times, investors will use that
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as an excuse to take profits and stocks start
falling in the sell-off.
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These other two causes, high inflation and
a recession, are related.
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The Fed is more likely to raise rates when
consumer prices jump and all of this means
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lower consumer spending and an economic slowdown.
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These last two bear market signals, booming
stock prices and external shocks, aren’t
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usually causes in themselves but just the
straw that breaks the camel’s back.
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When you’ve already got fears of a slowdown
or really expensive stock prices, any headline
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risk or the potential for war can send the
market lower fast.
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Now let’s look at those two investing strategies
for each type of stock market, two strategies
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for a bull market and two for the bear.
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First though, as a kind of informal survey,
where do you think we are right now in that
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bull vs bear market cycle?
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When do you think the next bear market crash
will hit stocks and why?
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Scroll down and let us know in the comments
below.
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The first strategy here for investing in a
bull market is going to be focusing on the
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sectors of the economy that do best when the
economy is growing.
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Here we see research by Fidelity on the 11
stock sectors and the average annual return
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at the first hint of a bull market, so in
that early stage of a rebound.
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Financials and consumer discretionary stocks
both do well because these are two of the
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hardest hit during a bear market.
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Lending rebounds and people start spending
again on all those beautiful things we love
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but don’t really need.
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The black diamonds here, and these are really
important, these show how often the sectors
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have produced that positive return during
this early-stage of a bull market.
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For example, you see that consumer discretionary
has jumped in every single instance and shares
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of industrial companies aren’t far behind
with a 90% hit rate.
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This doesn’t mean you’re jumping in and
out of stocks or timing the market.
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It just means maybe you focus a little more
money on these cyclical sectors during a bull
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market.
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You don’t want to rush out to sell your
shares of those non-cyclical sectors like
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utilities but maybe you just put any new money
in these sectors that benefit from a bull
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market.
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The next strategy for investing in a bull
market is called growth investing.
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This means looking for stocks of companies
growing sales and earnings at a faster rate
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than the market as a whole.
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Growth stocks are those of companies with
profits that are growing faster than competitors
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in their sector or industry and that last
part is important.
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If you’re just screening for stocks with
fast sales or earnings growth, you’re going
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to get a list of stocks exclusively in a few
sectors like technology and biotech.
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Growth is just naturally going to be faster
in these innovative sectors versus what you’ll
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find in consumer staples or industrials.
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So when you’re looking for growth stocks
to buy in a bull market, you want to do a
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separate screen for each sector.
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You want to find a couple of growth picks
in each sector to give yourself a diversified
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portfolio that doesn’t depend on any one
part of the economy.
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Now investing in a bear market is going to
be the opposite of this in many ways.
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Here we see that same analysis by Fidelity
of sector performance during a recession.
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The sectors that do the best here are consumer
staples, utilities and health care, all with
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hit rates of above 70% during a recession.
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So again when you see some of those recession
and bear market signals like rising interest
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rates or inflation, maybe you start shifting
your new investments into these non-cyclical
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sectors.
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That’s sectors of the economy that benefit
from stable sales even during a recession,
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things that people need to buy no matter what.
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Here I’ve shown buy, sell or hold signals
for the sectors depending on how well they
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tend to do in the different stages of the
economy.
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The early- and mid- stages would be bull markets
with the late-stage kind of the transition
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point into a bear market.
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Again, you don’t necessarily need to sell
out of a sector when it says sell here, I
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just wouldn’t be adding new investments
into stocks within the sector.
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The other bear market strategy you can use
is kind of the opposite of growth investing,
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or value investing.
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Now value investing is focusing on the fundamental
value of a stock and its share price.
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Here you’re prioritizing stocks that trade
below their fair value on an earnings or sales
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basis.
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Now those of you in the bowtie nation know
I’m not a big fan of the price-to-earnings
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ratio because it’s so easy for management
to manipulate reported earnings.
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Instead, focus on other price multiples like
the price-to-sales measure when you’re picking
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cheap stocks.
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Just like the growth investing strategy, here
you want to use that idea of investing in
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each sector as well.
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If you were to filter for stocks with the
lowest PE ratios, you’d get a list mostly
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of companies in the utilities and telecom
sectors.
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Instead, filter your search by each sector
individually to find the best value stocks
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in each group.
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Click on the video to the right to see how
I pick stocks for long-term investing.
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I’ll show you how to find universal trends
and the forever stocks that will benefit in
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bull and bear markets.
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Don’t forget to join the Let’s Talk Money
community by tapping that subscribe button
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and clicking the bell notification.
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