The stock market never moves up in a straight line. Historically, the stock market swings between two extreme market phases: the bull market and the bear market. Understanding how this mechanic works is the most important protection against fatal emotional decisions.
The Bull Market
A bull market describes a period of persistently rising prices (often defined as an increase of over 20% after a previous low).- The Psyche: Investors are euphoric, greedy, and prone to overconfidence (FOMO - Fear of missing out). The media reports on dream returns.
- The Danger: You forget the risk and often buy expensive fad stocks at extremely high valuations instead of solid world ETFs.
- The Psyche: Fear, panic, and pessimism dominate. The portfolio is deep red. The media predicts the end of the world (financial crisis, inflation, wars).
- The Danger: Panic selling. You sell deep in the red and realize the book losses before the market can recover. Those who sell at the low are no longer involved in the subsequent, often very rapid recovery.