Watching the value of your investments plummet can alarm even the most experienced investor. However, these market downturns, known as bear markets, are part of the investing game. And while bear markets are a lot less fun than the good times of bull markets, there are tactics to get through them. These tips will help you understand how to invest in a bear market.
What is a Bear Market?
Firstly, it helps to understand what a bear market is. A bear market is a market decline defined as a price decline of 20% or more from recent highs. Bear markets can refer to stock indexes, asset classes, or even individual stocks, although they usually refer to stock indexes.
Prices don’t necessarily decline continuously during a bear market. There can be significant spikes in asset prices, however, even with these spikes, there is a general downward trend.
Can You Make Money in a Bear Market?
Yes, you can make money investing in a bear market, especially if you invest for the long term, as bear markets offer an opportunity to bargain hunt for stocks.
During the short-lived bear market of March 2020, almost all stocks in every sector were affected, including those that were fundamentally solid and not performing poorly.
The same is true of the 2022 bear market. There are solid stocks trading at a low price, providing an opportunity to buy low and earn attractive returns once the markets turn positive and prices start climbing.
However, there are some precautions to take in your investment strategy if you invest in a bear market:
1. Ensure that you have enough available cash to cushion at least six months of expenses, especially as economic conditions are unfavorable.
2. Be able and willing to take losses on your investments as prices can continue to drop, even from 52-week lows.
3. Carefully research stocks you are considering buying to ensure that they have positive indicators.
What Investments Do Well in a Bear Market?
These investments can provide some relief during a bear market.
Some sectors are less affected by bear market conditions than others. For example, sectors that provide necessities such as consumer staples, healthcare, and utilities generally do relatively well as demand for their products continues, despite unfavorable economic conditions.
Other stocks to consider during a bear market are dividend stocks. Dividend stocks protect with their guaranteed income. Regular dividend payouts also help ease the pain of rising prices as a result of inflation. A great starting point for dividend stocks is dividend aristocrats, stocks that have been paying dividends and consecutively increasing their dividend yields for over 25 years. Try the TipRanks’ Dividend Center to discover dividend stocks and calculate your estimated returns.
Low P/E Ratio Stocks
It’s important to pay attention to the Price to Earnings ratio (P/E) during a bear market. Value stocks with a low P/E are more likely to perform well when compared to growth stocks with a high P/E ratio.
Gold is also considered a safe haven during a bear market run. The price of gold is uncorrelated to the stock market and often rises during volatile markets. Cash can be an option during a bear market, however, with inflation at 8% in the 2022 bear market, holding cash for an extended period will likely hurt.
There are ways to make money from falling stock markets, for example by taking part in short selling, options trading, and investing in index funds. However, make sure that you are aware of the risks and understand your own risk tolerance.
Tips for Investing in a Bear Market
Warren Buffett’s famously advised being, “Fearful when others are greedy, and greedy when others are fearful. If you do want to invest in a bear market, there are some essential tips that can help you protect your investments and generate profit
1. Keep calm
Don’t engage in panic selling during a bear market. Selling at a loss, when historically markets recover, might result in regret. To date, the only bear market that never fully recovered was Japan’s stock market crash of 1989.
2. Invest for the long term
Investing in the stock market for a long time is one of the best ways to protect your investments in a bear market, especially if you don’t need to liquidate your investments any time soon. A bear market is not a good time to invest in the short term.
3. Don’t try to time the market
It’s impossible to time a bear market and you may miss out on the opportunity to buy hidden gems if you try.
4. Pay close attention to when prices begin to turn
An upward trend can signal the end of the volatility of a bear market and an opportunity to jump in and buy stocks with less risk.
5. Diversify your investments
Asset allocation is particularly important during bear markets. Investing in bonds is one of the best ways to hedge your portfolio in a bear run as bonds are inversely related to equities. When stocks are down, the returns on bonds rise and vice versa. In the U.S. the I Bond seems to be one of the best hedges in the current market downturn, paying very high returns.
6. Adopt a dollar-cost averaging strategy
Keep making small purchases of stocks. This averages the purchase cost of your investment over time. It is also a way to ensure that you take advantage of the low prices and stay invested for the long term.
7. Invest in dividend stocks
As mentioned, dividend stocks can offer protection. Not only will the dividends act as a cushion to your investments, but once the bear market turns bullish, these investments will pay off handsomely.
8. Conduct research
Build your investment portfolio steadily with a mix of all the above through proper research. Do not be all-in or all-out during a bear run. TipRanks can help you conduct data-driven stock research and make smart investment decisions.
How Long Will this Bear Market Last?
It’s impossible to know how long this bear market will last.
According to Hartford Funds, an average bear market phase lasts for 289 days (9.6 months). Compare this to the average phase of bull markets that run for 991 days (2.7 years) and you will have all the assurance you need to hold on to the current market downturn.
Notably, Hartford also revealed that half of the S&P 500’s best gain days over the past 20 years, occurred during a bear run. Thus, putting in perspective the strategy of being invested for the long run during a bear market.
A few of the notable bear market runs in history are the great depression of the 1930s, the dot-com bubble of the late 1990s, the housing bubble of 2008-2009, and the shortest bear market to date, witnessed during the COVID-19 pandemic 2020 (33 days).
During a bear market, investor sentiment is low and pessimistic. As a result, investors sell holdings, which results in market prices falling further. Eventually, investors regard the low prices as buying opportunity which can signal the end of a bear market.
Bear markets should not be confused with market corrections. During corrections, indexes, or stock falls by 10% or more, from their recent highs. A stock market correction may or may not end up becoming a bear market phase.