For many visitors, a trip to Wall Street is not complete without a photo of the famous Charging Bull statue. While most people understand the link between the bull and the idea of a bull market, knowing exactly how to define a bull, bear and other market conditions and events such as a black swan is not always so easy. As a financial professional, however, explaining these terms and other financial concepts to a client is a vital part of your job.
Let’s take a look at popular terms used to illuminate market conditions, how they apply to your clients and how to put their biggest worries at ease in a volatile market.
Defining the bears and bulls for your clients
While you understand these markets in and out, you must also be able to explain them simply and clearly to clients. Below are definitions of the most commonly used terms to describe market conditions:
Bull market – A bull market is a market where share prices are generally rising and investors are excited about putting money into the stock market. While the term is most often used for conditions in which stock prices are expected to rise, the term bull market is applicable in bond, currency and commodity markets, as well.
Although there is no official definition, one common indication of the existence of a bull market would be a rise of 20% in broad-based indices. This may be followed by a significant decline in market values. Because of these characteristics, you can easily spot a bull market when looking backward, but it is difficult to identify while in progress.
The market is currently in a long-time bull run nearing a decade in length. While this kind of long-term growth can make investors very confident, it is important for them to still maintain a balanced portfolio and avoid knee jerk reactions to market news.
Bear market – The opposite of a bull market is a bear market. One measure of a bear market would be when broad-based indices fall 20 percent or more over a period of time in a consistent manner. A bear market will usually be exacerbated by widespread selling, creating more downward pressure on stock prices.
It is also important for your clients to understand what a market correction is and is not. A market correction is when the market goes down about 10 percent, half of the drop of a bear market. In both bear and bull markets, stock prices are typically represented by major indices like the S&P 500, NASDAQ Composite and Dow Jones Industrial Average.
During a bear market, it is common for investors to worry, sell investments, and possibly want to run for the hills. It is important to help clients keep a calm, level mindset and a long-term focus during any down market.
Black swan event – Your clients may associate the term “black swan” with the popular, yet terrifying, 2010 film. But when a black swan hits Wall Street, it can be even more terrifying for your clients. According to the Financial Times, a black swan is an event or occurrence that has severely negative effects on markets and would not have been predictable based on past trends. The term came to the financial markets from finance professor and author Nicholas Taleb’s 2007 book The Black Swan: The Impact of the Highly Improbable.
The Great Recession of 2008 is an example of a black swan event, as this type of housing, investment and economic breakdown had never occurred in the past and was very difficult to predict. Because black swan events are not predictable, it is important for financial professionals to monitor risk and help clients take steps to guard against major losses.
Certain types of indexed annuities, those structured with a pre-determined “floor,” could complement your clients’ Social Security and other more traditional retirement investments to help them retire comfortably, even with the risk of a market downturn.
Pros and cons of varying markets
Buying low and selling high, it is often easier said than done. When you account for your clients’ nerves and emotions, it is understandable why investors may want to take their cash and run for the hills in a bear market and then rush to invest in a bull market. In the decade of fallout from the 2008 financial crisis, worries of losses likely still linger in the back of investors’ minds.
For most investors, the best strategy may be to ignore major market fluctuations and focus on the long term. “The market will go up and it will go down, but not necessarily in that order,” said famed investor J.P. Morgan. If investors sell every time the market goes down, they can miss out on the rebound when the market comes back up.
So what happens when a bull, bear and black swan walk into a bar?
While a bull market can be very popular as investors enjoy the ride up, a bear market catches a lot of bad press and can be the downer of the crowd (the same goes for the markets’ voice of reason, the Correction). While there is a natural push/pull between bull and bear market dynamics, investors need to know a black swan can be looming at any time. Investors can ignore the black swan or make a plan for it.
Keeping investors calm during market volatility
The Great Recession is no distant memory for investors, and the threat of another black swan market event might lead to risk aversion. It can be easy for some clients to let emotions get involved and this can lead to poor long-term investing decisions. As a financial professional, it is your role to help plan for the worst while building toward the best. With the right market knowledge and investment strategy, you can help your clients do just that.
Registered index-linked annuities are complex Insurance and investment vehicles. Before investing, investors should speak with a financial professional about the Contract’s features, benefits, risks and fees and whether the Contract is appropriate for them based on their financial situation and objectives.
An indexed annuity is not an investment in an index, is not a security or stock market investment and does not participate in any stock or equity investments.
Annuities are not a deposit, not insured by any federal government agency, carry no bank or credit union guarantee, are not FDIC/NCUA insured and may lose value.
Product guarantees are backed by the financial strength and claims-paying ability of the issuing company.
Variable annuities issued by Protective Life Insurance Company (PLICO) in all states except New York and in New York by Protective Life & Annuity Insurance Company (PLAICO). Securities offered by Investment Distributors, Inc. (IDI). All companies located in Birmingham, AL. IDI is the principal underwriter for registered insurance products issued by PLICO and PLAICO, its affiliates.
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