A “bear” market refers to a widespread drop in asset prices of at least 20% from recent highs. Of course, these times are nothing to look forward to, but fights can be dangerous.
Here, we guide you through eight key investment strategies and mindsets that will help you stay calm and play dead when the stock market is hurting your returns.
control your fears
There’s an old saying on Wall Street: “The Dow Climbs a Worry Wall”. In other words, over time, the Dow Jones continued to rise despite economic troubles, terrorism, and countless other calamities.
Investors should always try to separate their emotions from the investment decision-making process. What looks like a huge global catastrophe one day may be remembered as just a blip on the radar screen years from now. Remember that fear is an emotion that can cloud your rational assessment of a situation. Keep calm and continue!
Accumulate with dollar cost average
The most important thing to keep in mind during an economic downturn is that it is normal for the stock market to have negative years – this is part of the business cycle. If you are a long-term investor (i.e. with a time horizon greater than 10 years), one option is to take advantage of dollar cost averaging (DCA).
By buying stocks regardless of price, you end up buying stocks at a low price when the market is down. In the long run, your costs will “go down on average”, giving you a better overall entry price for your inventory.
If you “play dead”
During a bear market, bears dominate and bulls don’t stand a chance. There’s an old saying that the best thing to do during a bear market is to play dead – it’s the same protocol as finding a real bear in the woods. Fighting would be too dangerous.
By staying calm and not making any sudden moves, you will avoid becoming a bear’s lunch. Faking financial death means investing more of your portfolio in money market instruments such as certificates of deposit (CDs), US Treasuries and other short-term, highly liquid instruments.
diversify
Having a percentage of your portfolio spread across stocks, bonds, cash and alternative investments is at the heart of diversification. How you allocate your portfolio depends on your risk tolerance, time horizon, goals, etc. Every investor situation is different. A proper asset allocation strategy will allow you to avoid the potential negative impact of putting all your eggs in one basket.
Invest only what you can afford to lose
Investing is important, but so are food and shelter. It is unwise to take short-term funds (ie mortgage money or groceries) and invest them in stocks.
As a general rule, investors should not invest in stocks unless they have an investment horizon of at least five years, preferably longer, and they should never invest money they cannot afford to lose. Remember that bear markets and even small corrections can be extremely destructive.
Look for good prices or values
Bear markets can offer great opportunities for investors. The trick is to know what you are looking for. Beaten, battered, undervalued: these are all descriptions of stocks in a bear market.
Value investors like Warren Buffett often see bear markets as buying opportunities because good company valuations are being mixed with bad companies, resulting in very attractive valuations.
Buffett often builds his position in some of his favorite stocks during the market ‘s less bullish periods, because he knows that the nature of the market is to penalize even the good companies more than they deserve.
Take stock of defensive industries
Defensive, or non-cyclical, stocks are stocks that generally outperform the broader market in bad times. These types of stocks offer consistent dividends and stable earnings, regardless of the state of the general market.
Companies that make short-lived household products like toothpaste, shampoo, and shaving cream are examples of defensive industries because people will use these items even in tough times.
Take it easy
There are ways to take advantage of falling prices. Short selling is one way to do this, by borrowing a company’s stock or ETF and selling it in hopes of buying it back at a lower price.
Short selling requires margin accounts and can cause damaging losses when markets rise and short positions are liquidated, putting further pressure on prices.
Put options are another option that appreciate when prices drop and guarantee a minimum price to sell a security, effectively limiting your losses if you use them for hedging.
You must be able to trade options on your brokerage account to buy put options.
Inverse exchange-traded funds (ETFs) also offer investors the opportunity to profit from a drop in major indexes or benchmarks such as the Nasdaq 100.
When major indexes fall, these funds rise, allowing you to profit while the rest of the market suffers. Unlike short put or put options, they can simply be purchased from your brokerage account.
Why would it be a great idea to continue investing in bear markets?
In the long run, the stock market tends to rise and the economy grows. While bear markets can break this uptrend, these downturns always ended and eventually reversed to make new highs. By investing in bear markets, you can buy stocks when they are on sale and build stronger positions.
How often do bear markets occur?
Historically, US bear markets have occurred every 4.5 to 5 years on average.
Why is it called the Bear Market?
There are some competing theories as to the origin of the terms bull and bear markets. One is the fact that bulls tend to charge by slamming their horns upwards; Bears usually attack by lowering their claws. Another theory is that the term “bear” comes from the early days of the fur trade, when bear skins were considered a particularly risky commodity in terms of price and durability.
What was the steepest bear market to date?
The steepest and longest bear market to date was the crash of 1929-1932, which coincided with the Great Depression.