Contrary to popular believe, bull markets do not last forever. Bear markets are a part of the market cycle that will follow, impacting your portfolio negatively. No one can tell how long a bear market will last and how severely it will affect your portfolio. Prepping and strategizing on how to invest in a bear market can not only help you reduce your losses but also ensure you make money from it.
What is the bear market?
A bear market is defined as a prolonged time when security prices decline by 20 percent or more. When the decline continues for more than 2 months, it is said to be the entry into a bear market. A bear market is marked by a period of negative returns. Market sentiments are pessimistic, leading to more stock sell-offs that further weigh down the market. The decline in stock prices can be caused by several factors such as panic selling by investors triggered by an economic crisis such as an unexpected catastrophic event, a financial crisis in one sector, market correction and decline in corporate profits. It takes courage to ride the storm, and the bear market can be difficult on both new and seasoned investors. The best approach to a bear market would depend on the investors’ time horizon, investment objectives and risk tolerance. While most fear bear markets, it can be the best opportunity to grow your portfolio and prepare the groundwork for long term wealth building.
What to do in a bear market?
Severe bear markets may wreak havoc in your finances. Economic downturns can lead to salary cuts, reductions and delay in payments. Before you delve into investing in a bear market, it is better to arm yourself first for a sputtering economy. Create a cushion and build a contingency fund that covers expenses for 6 months. This will save you during eventualities and prevent you from using your retirement savings.
Bear markets are also a good time to reassess your risk appetite. Some investors wait to ride out the bear market before investing. When the market fully recovers, investors often realise that they have missed the bus. The longer you wait, the further you fall behind. So make a staggered entry into the market but ensure you have enough cash in hand.
To make informed decisions, it is essential to have a financial plan in place. Without a plan, you are likely to make rash decisions during market upheavals.
How to invest in a bear market?
Some of the tips for investing in a bear market are as follows:
Hold tight – If you believe in any company, then hold on no matter how steeply its stock price falls. You can consider selling if you need cash; you should also reassess your portfolio to check if trading in the company’s shares is prudent. It is better not to jeopardise your goals by liquidating long term investment.
Buy stocks – During a bear run, the stock price of all companies fall. It is considered the best time to invest and buy shares. However, you should buy stocks of good companies which will rise in the future. Rebalance your portfolio and shift focus from growth stocks to value stocks.
Take a long term approach – It is unlikely that the stocks you buy will yield returns within a year as it is difficult to predict how long the bear market will last. Hence take a long term approach and buy stocks that you will hold for a longer period.
Buy dividend stocks – Bear markets are a good time to net companies with a history of high paying dividends. Dividends are a good way of generating a steady income. It will also allow you to reinvest the money you earn through dividends. However, do not ignore the high growth companies by looking only at dividend stock. When prices drop, it is the best time to buy high-growth shares that you have always been eyeing.
Diversify your portfolio – While bear markets are the best time to buy stocks, it can also be a good opportunity to diversify your portfolio and buy bonds. Bonds are less volatile and will give you a regular cash flow that you can reinvest. Bonds are fixed assets which reduce the amount of risk in your retirement portfolio. Addition of such assets that are not dependent on the market’s rise and fall can increase returns.
Timing the market – most investors flee the market and exit their investments during the bear market. Market volatility is a fact and while the drop creates a panic among investors, timing the market is a fool’s errand. The best move during the bear market is to ride through the storm.
Bear runs do not last forever. Hence being patient with your investments will win the day. Do not be in a hurry to sell your stocks. Keep monitoring the growth of companies and hold shares for a longer time horizon. If you are a new investor, it is a good time to enter the market. But make sure you invest in good stocks.