How to Invest in a Bear Market

If there’s one thing seasoned investors know, it’s the importance of weighing risk and opportunity. Newer investors may be intimidated by trying to strike that balance, especially when investing in a bear market. Unlike a bull market that charges ahead with rising stock prices and optimistic market sentiment, a bear market indicates a time of retreat with declining stock prices and more pessimistic market sentiment. At first glance, it may seem riskier to invest at times like this. But once you understand how to invest in a bear market, even new investors can move forward with confidence. 

In this article, we’ll cover:

• Characteristics of bear markets
• How to invest in a bear market

Bear market characteristics

Generally, a bear market occurs when a broad market index falls by 20% or more over at least a two-month period. Bear markets can represent normal stock market fluctuations, or they can be a sign of a more serious downturn like an impending recession. It’s important to remember, though, that bear markets are normal. There have been 26 bear markets in the US since 1928, including the stock market crash of 1929 and the 2008 financial crisis. For the sake of comparison, there have been 27 bull markets in that time period. And bear markets don’t always signify prolonged economic slumps. History shows us there’s no way to predict the length of a bear market with 100% accuracy. Some have lasted as few as 33 days, while others carried on for more than 600 days. And even within a bear market that lasts a while, rallies can occur, in which there’s a sharp rebound in stock prices for a short time.  

Types of bear markets

There are three types of bear markets, each with unique characteristics. Some are longer-lasting, some trigger more violent downturns, and some tend to show quick recoveries. Understanding the type of bear market you’re in, whether event-driven, cyclical, or asset-bubble unwind, can help you make investment choices that align with your goals.

• Event-driven: This type of bear market occurs when external events outside the stock market, such as pandemics, wars, terrorist attacks, and natural disasters, create chaos and uncertainty in financial markets. These downturns tend to be violent but have a less severe total impact and fairly quick recoveries.
• Cyclical: Normal fluctuations in the business cycle drive cyclical bear markets. They often drive drawdowns similar in severity to event-driven markets but are much longer-lived. It’s worth noting that such ups and downs in the economy overall are considered a regular part of how business operates.
• Asset-bubble unwinds: These cyclical fluctuations occur when certain assets that have quickly and dramatically risen in value suddenly decline sharply, leading to broad disruption in financial markets. Asset-bubble unwinds are specific to certain situations, like an overvaluation of certain sectors or assets like real estate, but they’ve lasted the longest and seen the largest total decline in stock prices.

How to invest in a bear market: 6 strategies

There’s always risk, regardless of whether you’re investing in a bull market or a bear market. But the right investment strategy can help you persevere when the market is down. The first thing to consider when investing in a bear market is your risk tolerance and your financial goals. Longer time horizons can generally withstand some volatility, but if your goals are shorter-term you may want to think about moving some assets into less risky investments. However, resist the urge to pull out of the market and focus on these strategies instead.

1. Don’t sell unless you absolutely have to

Unless a truly pressing need arises that your emergency fund can’t cover, keep your investments in the market. While seeing the value of your portfolio fall during a bear market can be worrying, uncertain markets call for a long-term investor’s mindset. Remember that losses during this time are likely to be balanced by gains when the economy recovers, based on historical market performance. Gains may take more time in a bear market, and holding stocks for the long term is likelier to help you realize those gains than selling at a loss.

2. Take advantage of dollar-cost averaging

Instead of attempting to time the market, take advantage of dollar-cost averaging (DCA). This investment strategy allows investors to buy assets over time by investing a set amount of money on a regular basis, regardless of stock market volatility. Because you’re buying securities regularly over a long period of time, you’ll automatically buy fewer shares when prices are high in a bull market and more when the prices are low in a bear market. This allows you to spread out your investment purchases over time so the average cost per share is less impacted by market swings. Automated investing or setting up recurring transfers from your checking account can make DCA easier to stick within a bear market. 

3. Diversify your portfolio

A diversified portfolio can be an important defense against market volatility and a helpful guide when deciding what to invest in during a recession. Diversifying means splitting your portfolio across different asset classes and industries that behave differently in the market, which reduces your vulnerability to the risks tied to any single asset. Stocks, bonds, exchange-traded funds (ETFs), cash, and other asset classes can all play a role in a well-diversified portfolio. If you invest in stocks, you can apply diversification to your investment choices by putting money into multiple different sectors. For instance, you might want to hold shares in tech companies, energy companies, and consumer-goods companies so that if prices drop dramatically in one of those sectors, any losses could be balanced by better performance in the other sectors. 

4. Invest in sectors that perform well during bear markets

No matter what the market brings, certain sectors tend to remain in consistent demand. In a bear market, defensive stocks from the utility, healthcare, and consumer staples sectors may continue to perform well because they cater to people’s basic needs, such as electricity, medical care, and groceries. Defensive stocks may lower your overall risk as part of a diversified portfolio, especially in times of economic downturn.

5. Focus on the long term

When you’ve got investments in a bear market, it’s easy to get caught up in the short-term view of what’s happening with your money in the present moment. But changing your investment plans with every shift of the market creates unneeded stress and puts you in the position of trying to guess what the market will do at any given time. Instead, focus on long-term goals like retirement savings. The bear market will likely correct itself in time, and you can eventually see the bull market rewards that come with patience.

Thoughtful strategies for a down market

Investing wisely in a bear market is possible, and a thoughtful investment strategy like the Stash Way can help: invest regularly, diversify your portfolio, and invest for the long term. The Stash Way can be your strategic investment guide, no matter what the market brings. 

Investing made easy.com

Start today with any dollar amount.

Get Started