How To Succeed In A Bear Market
Simply put, a bear market is one where stock prices fall for a sustained period. This can happen to the market as a whole or to specific market indexes. For instance, the S&P 500 Index can experience an extended downturn and fall into a bear market. Typically, it's not considered a bear market until the market prices drop over 20% for more than two months. Because of this sharp, lengthy decline, investing during a bear market can be difficult, frustrating, and confusing.
Fortunately, there are investment strategies you can use to take advantage of a bear market.
What causes bear markets?
Bear markets occur due to several economic factors working in conjunction with each other. For instance, interest and inflation rate hikes could happen simultaneously. During this time, employment numbers might go down. Whatever the specific factors might be, they work together to slow down the economy. Economists and investors closely watching the economy recognize this and use it to inform market decisions. This causes less investing, which can cause less money to enter the market. Stock prices go down. Eventually, this becomes a downward trend and we've entered a bear market.
How to invest in a bear market: 4 steps to success
Investing in a bear market takes strategy, patience, and courage. It's important to remember that these market challenges are a bear that can be tamed. As always, a financial advisor can help you develop a strategy that works within your goals and risk tolerance level.
When you've decided to invest during a bear market, consider the following steps and strategies:
1. Understand your circumstances
When investing, education is always a key element in creating a successful strategy. When you know what you're up against, you can decrease the chances of succumbing to fear or being caught off guard. Most importantly, knowing what the problem is helps you better understand what the potential solutions are. During a bear market, it's especially helpful to understand what is happening, what will continue to happen in the short term, and what might happen in the future.
Keep in mind also that a bear market isn't necessarily a financial crisis. In fact, bear market declines last an average of 388 days. This means that they don't last forever—usually for just over a year—and all you've got to do is make a plan that can carry you to the end of the bear market.
2. Resist panic selling
When prices go down, the first solution that might come to mind is to sell your stock. During a bear market, this gut reaction might be based in the fear of losing your money. And that's understandable—as prices drop, so does the value of your stock. What happens if the value continues to plummet?
Unfortunately, what seems like a simple solution could actually cost you even more money. When you sell your stock, you receive income—taxable income. The more you sell, the more you owe in taxes. Suddenly, you've immediately lost a large portion of your money.
In addition to taxes, panic selling can result in a tremendous opportunity cost. As we stated above, bear markets don't last forever. When the trend turns in the other direction and prices begin to rise, you might wish you'd held on to some of your stock. If you've sold all of your stock, it could take time (and additional funds, thanks to the tax burden) to recoup your previous value. By then, you might have lost out on the opportunity to grow your money.
3. Don't spread yourself too thin
Diversifying your portfolio is often touted as a strong strategy for growing wealth. Normally, we'd agree. However, keep in mind that during a bear market, it's highly likely that most or all of your stock is dropping in price. Because of this, diversifying your portfolio is unlikely to prevent you from losing value on your investments. Additionally, by spreading your investments too thin, you could miss out on the few opportunities for growth. Consider a portfolio in which you own stock that grows during the downturn. If you've diversified that portfolio, you might not own enough of that stock to make much difference in the long term.
Instead, you might consider researching which investments historically do well during a bear market. It might feel antithetical to put most or all of your money into so few investments. This is especially true if you don't have access to some of the investment types that do well. For example, you might invest in staple stocks such as beverage and food companies but have little access to some high-quality stocks or real estate investments.
Lack of diversification is scary—especially since these investments might not have much higher returns than other investments. However, these moves can help you minimize your losses during an otherwise down period in the market.
4. Focus on long-term goals
As we said above, bear markets don't last forever. Focusing on your long-term goals can help you reduce your chances of making panicked decisions. If you invest in order to provide for your future, such as during your retirement, then minimizing losses becomes more important than growing wealth. It also gives you time once the downturn ends to recoup any losses you may have sustained.
So long as you remain patient, make smart decisions, and focus on the long term, investing during a bear market can be seen as a bump in the road rather than an insurmountable mountain to climb.
Advantages to investing during a bear market
There is a positive side to bear markets. Despite their challenges, they come with a few hidden benefits. For instance:
It's good for new investors
Sometimes, everyone else selling their stock can be a good thing. For new investors, it's an opportunity to get into the market while prices are low. Because bear markets are often short-lived, it's a good time to make long-term investments that could pay off quite well over the following few years.
It tests your skills
Facing the challenges of the market can help you learn more about yourself, find out what you can handle, and grow your knowledge of how the market works. By making moves and trying new strategies, you can learn new skills that you can bring with you as you continue to invest long after the bear market ends. The more skills and knowledge you have, the more successful you can become.
It often leads to bull markets
Keep in mind that bear markets don't exist in a vacuum. Instead, they're part of the flow of the market. The longer you invest, the more bull and bear markets trading off back and forth becomes the natural order of things. The bear market might be tough, but there's often a bull market coming up right behind it. Keep in mind that:
- Bull markets usually last much longer than bear markets
- Bull markets experience more growth than bear markets experience losses
If you've developed strong strategies and minimized your losses, a forthcoming bull market can help you build back better and stronger.
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