Investors are bracing for the worst as the market continues selling off, and talks of a recession are rising. If you wish to boost your returns this year, learning the ins and outs of how to invest in a bear market is a good place to start.
Stocks are in a bear market when major indexes fall over 20%. For example, the pandemic was the last time it happened, causing the SPDR S&P500 Trust (NYSE: SPY) to fall over 35% from its ATH.
The fallout was short-lived as the Federal Reserve (Fed) eased policies to support the economy. Will this time be different?
With inflation up 8.3% in the past year, the Fed is changing its pro-growth policy stance to focus on calming the overheated economy. Furthermore, the tension in Ukraine is heating up as nations continue proposing sanctions to dampen Russia’s ability to raise war funds.
Analysts are predicting a global economic slowdown as a result. There has never been a better time to get defensive between slowing economic conditions and the rising price of goods. Keep reading to learn how to invest in a bear market and get your portfolio back in the green this year.
How To Invest in a Bear Market and Still Make Money
Bear markets are a natural part of the financial system and can happen anytime. Although they are typically short-lived compared to bull markets, they can wreak havoc on your portfolio. Learning how to invest in a bear market can help protect your account from significant drawdowns while boosting returns over time.
In bull markets, growth opportunities are abundant. But, in a bear market, the chances of finding quality growth stocks are much more difficult. Therefore, it’s important to follow a set of rules to keep you focused and grounded during the panic. Below are a few tips to help you learn how to invest in a bear market and still make money.
No. 5 Reassess Your Conviction
With many stocks already down 30, 40 and 50% from their highs, it may be a good time to rethink your investments. Go through your portfolio and consider if you still feel the same way about the company now as when you bought it. Ask yourself…
- Why did you invest in the company in the first place?
- Do you feel the same as when you first invested?
If you do, the stock is likely worth holding. Bear markets are not forever. Then again, it would be best if you also consider your investment goals and time horizon. If you are a long-term investor, giving the market time to bounce back will help multiply returns in the long run.
If you bought the company on a whim or heard it was “going to the moon,” now may be the best time to reconsider. Does the company still have the ability to grow and generate earnings?
These are just a few questions to ask yourself when learning how to invest in a bear market. Focus on companies with strong free cash flow and a history of paying dividends.
No. 4 Buy Leaders
In the stock market, leaders tend to lead. In other words, companies with solid cash flow, bulletproof balance sheets and the ability to generate earnings.
More important, market leaders with pricing power (the ability to raise prices without significant loss of demand) are best positioned for long-term growth. A few questions to ask yourself…
- Is there a better substitute?
- With less income to spend, will consumers still buy it?
If there are better or cheaper alternatives people will buy instead, you might want to avoid it. Otherwise, if there are no better alternatives and consumers will continue spending, it sounds like a long-term leader.
Keep reading to learn more about how to invest in a bear market.
No. 3 Cash Is King
In a bear market, if you answered “Yes” to either question above, you may want to park your money somewhere else. For instance, holding cash allows you to purchase when the time is right. Furthermore, you can set price targets and average down if you plan to do so.
Holding cash in a bear market is better than owning a company with no solid plans for future growth. Otherwise, setting price targets for buying leaders can help create maximum long-term returns. Other than the obvious holding cash, looking for companies that generate earnings with strong cash flow can also help in a bear market.
[gated-content list=’INVESTME’ headline=’Keep Reading This Article and Find Out the Top 2 Tips on How to Invest in a Bear Market’ body=’
Enter your email below to read the reveal the top two tips on how to invest in a bear market.
You’ll also be opted in to receive our free daily e-letter, Investment U, where you’ll find expert investment insight, analysis and stock picks for all the best investment opportunities.
‘ button=’Unlock The Rest’ mvid=’1516177′ coreg=’274702′]
No. 2 Don’t Put All Your Eggs in One Basket
The old saying “don’t put all your eggs in one basket” comes from an ancient proverb, suggesting you risk dropping it and losing everything if you do. You can apply the same meaning to the stock market.
Investing all your money in one stock or asset risks losing everything if something goes wrong. Instead, buying leaders in different markets can help cushion downfalls and provide even greater upside. For example, if your portfolio heavily favors tech stocks, investing in consumer defensive stocks such as Walmart (NYSE: WMT) will diversify your account.
No. 1 How to Invest in a Bear Market: Be Patient, Stay Calm
The first rule for investing in a bear market is to stay calm. With this in mind, the last thing you want to do is panic sell and miss out on long-term returns.
Learning how to invest in a bear market is no easy task. In particular, every bear market is different. These markets can appear out of nowhere, lasting days to years, and can produce significant losses.
However, if you go into it with a plan, it can be an opportunity to accelerate long-term returns. If you stay patient, wait for good entry points and buy leaders, history has shown us the market is in your favor in the long run.
Lastly, bear markets are not known to be long-lasting. According to recent research, the average bear market lasts 9.6 months while bull markets last 2.7 years. In other words, if you are a long-term investor, keep your sights set on more significant returns in the long run. Now is the chance for you to adjust your portfolio for optimal growth going forward.
[/gated-content]