The term “bear market” is enough to make many investors nervous. However, severe market declines are inevitable and often only last briefly, as bull markets do while prices rise. Even in a down market, profitable trades may still be made.
Read on to learn about bear markets and the measures you can employ to protect and grow your investment portfolio until the bear turns way to the bull.
Define the term “bear market.”
For investments, a bear market is considered to have occurred when a broad market index has dropped by 20% or more from its most recent peak.
The threshold is a 20% drop, but bear markets typically fall much more than that over time. Although a bear market may experience brief periods of relative stability known as “relief rallies,” the trend is still down. Investors’ pessimism and lack of faith are hallmarks of bear markets. Investors during a bear market may overlook any good news and keep selling quickly, resulting in lower prices. Bear markets stop when investors decide the right time to buy stocks at historically low prices.
Bear markets, like the Dow Jones Industrial Average or specific stocks, can affect the entire market. Bearish investor sentiment regarding a particular store is not likely to have a systemic impact on the market. Despite positive news and expanding earnings, stock prices tend to fall when the need or index turns unfavourable.
When and why do stock markets go into a bear trend?
Sometimes a bear market precedes or follows a recession, but this is not always true.
Investors closely monitor hiring, wage growth, inflation, and interest rates to determine if the economy is decelerating.
Investors anticipate a fall in company profits when they see a weakening economy. As a result, the market falls as investors sell their shares. An increase in unemployment and gloomy economic prospects may follow a bear market.
On average, a bull market continues for 1,742 days, while a bear market lasts 363 days. According to Invesco’s research, bear markets are statistically less severe than bull markets, with average losses of 33% compared to bull market average returns of 159%.
Investing Strategies for the Bear Market
1. Use dollar-cost-averaging to your advantage.
Let’s pretend one of your stocks suffers a 25% price drop from $100 to $75 per share. The stock’s price may seem appealing if you have the means to invest and the desire to increase your holdings in this company.
The catch is that you need to be corrected. It’s possible that the stock has further to fall, perhaps 50% or more from its high of $75 per share. This is why trying to “time” the market by buying low and selling high is perilous.
Dollar-cost averaging is a method of investing that spreads out the expense of making multiple trades over time. Using dollar-cost averaging, you invest a set amount of money periodically, typically in equal quantities. This helps you avoid investing in a single stock when its price is extremely high (while still taking advantage of market declines).
Bear markets are unsettling, to be sure, but history shows that the stock market always recovers.
2. Spread your investments out.
In addition to buying stocks at a discount, diversifying your portfolio with a range of asset classes can be helpful in any market condition.
All the stocks in an index like the S&P 500 will drop in value during a bear market, though not necessarily by the same amount. For this reason, spreading your investments around is crucial. Diversifying your portfolio so that it has both strong performers and underperformers will help cushion the blow of any single underperformer.
If only you knew who was going to win and who was going to lose. Since bear markets often coincide with economic recessions, investors often choose assets that give a more consistent return. To use this “defensive” strategy, you may wish to increase your holdings in the following securities:
They are paying dividend stocks- Many shareholders continue to seek dividend payments despite flat stock values. Companies with above-average dividend payments will be desirable to shareholders in down markets. (Are you in it for the dividends? Please view our selection of high-yielding stocks here.
Bonds- When the volatile stock market, bond values tend to move in the other way, making them an attractive investment option. Adding more high-quality, short-term bonds to your portfolio may help mitigate the adverse effects of a bear market.
3. Make investments in industries that do well during economic downturns.
In a down economy, which investments fare best? Consider the necessities customers cannot buy, as they are the industry’s most likely to thrive in a bear market. Consumer staples and utilities tend to hold up better during bear markets because consumers still need them even when prices are skyrocketing, like gas, groceries, and medical care.
Index funds and exchange-traded funds (ETFs), which follow a market benchmark, allow investors to target specific market segments. One recession-proof investment is in consumer staples companies, which may be accessed through exchange-traded funds (ETFs). Investing in an index or exchange-traded fund (ETF) gives you exposure to a broader range of markets than buying a single stock.
4. Set goals for the future
All investors’ mettle is put to the test during bear markets. It’s difficult to wait for the market to rebound during such times, but experience suggests it will take some time. Bear markets are inevitable, but if you’re investing for the long haul, like retirement, the bull markets you experience will more than make up for them. You shouldn’t put money in the stock market that you’ll need in less than five years to accomplish a short-term goal.
Avoiding the urge to sell stocks when markets collapse is one of the best things you can do for your portfolio. You can have a robot-advisor or a financial advisor handle your investments in good times and bad for you if you find it challenging to keep your hands off them during a bear market.
In the end, bear markets are a great time to review your investment strategy and remind yourself of your long-term goals. If your current asset allocation seems reasonable, stick with it. Bear markets provide an opportunity to rebalance portfolios at a time when capital gains taxes are lower than they would be during a bull market.
In conclusion, bear markets
Stock market declines of 20% or more from recent highs might be unsettling, but investors should resist the urge to sell.
Dollar-cost averaging, diversification, investing in recession-resistant sectors, and a focus on the long term can help investors weather the storm of a bear market, which typically lasts less than a year.
