It’s a well-known fact that stock markets are inherently volatile. These markets change daily, sometimes by the second. If you’ve hung around stock traders and investors, you’ve likely heard them use the terms bull market and bear market to describe the stock market’s affairs. These terms have significant connotations because they describe how the market is faring.
Ideally, investors and traders want bull markets. Stock prices skyrocket in these markets, and investor sentiment is at an all-time high. Unfortunately, the stock market, like life, doesn’t work that way. The stock market has a natural ebb and flow, meaning sometimes the market will be bullish and others bearish.
Generating sizable returns in bullish markets is straightforward. Investing or trading in financial markets is never easy, but it’s easier for people to prosper when the market conditions are promising. On the other hand, things take a turn for the worse when the market heads toward a downturn.
Economists and experts have different definitions for what constitutes a bear market. However, most agree that a market declining by over 20 percent falls under the bear market classification.
Bear markets and bull markets tend to fluctuate cyclically. Research shows 26 bear markets in the SP 500 index since 1928. Conversely, there have been 27 bull markets in the same period.
Bear markets often send investors and traders into a frenzy, and rightly so. Some hallmark signs of bear markets include stock prices plummeting, causing investor confidence to decline. As a result, investors and traders begin offloading their stocks quickly, hoping to protect themselves from the falling market’s wrath.
Studies show stocks lose 36 percent of their value during bear markets. On the flip side, bull markets cause stocks to appreciate by over 114 percent. These numbers show a stark contrast, indicating that perhaps traders and investors aren’t wrong to offload their stocks when the market declines and enters the bearish territory.
As previously stated, stock markets have ebbs and flows. Sometimes, the stock market will perform exceptionally well for an extended period, setting new highs and records. However, eventually, something has to give. That’s when the markets enter the bearish territory. If you’re an investor or trader, you’ll want to learn how to navigate the market during such periods. After all, bear markets are more common than some people think. Contrary to popular belief, you can also make significant profits during a bearish run, provided you know what you’re doing.
Bear Market Investing Strategies
Here are some bear market investing strategies you should add to your arsenal for future use. A bear market might not be very far away, considering how poorly financial markets have performed in 2022. The SP 500 index has already declined by over 20 percent since peaking on January 3rd, 2022. Likewise, the NASDAQ-100 has also plummeted by over 30 percent since setting records in November. It’s also worth noting that stock markets aren’t the only financial markets to be nosediving. The crypto market has been getting slaughtered in 2022. Bitcoin, for instance, has lost more than two-thirds of its value since touching almost $70,000 seven months ago. Other cryptocurrencies haven’t fared much better.
Traders and investors must be cognizant of such uncertain times. As a result, learning these bear market investing strategies will help you.
Utilize Dollar-Cost Averaging
Stock markets decline periodically. It’s nothing new. However, the important thing to remember is that you can utilize dollar-cost averaging to minimize losses. Many investors and traders often like to purchase stocks when the market is down because it lets them purchase shares for a lower price. They also continue purchasing shares when the market booms despite the high prices. In the end, they average the price of shares bought. Generally, they end up with a better overall entry price than their peers because they utilized their resources to purchase stocks when prices were low. Using dollar-cost averaging is crucial for long-term investors because financial markets are inherently volatile. You can’t expect the good days to continue without there being some cloudy skies in between.
Match Your Money to Your Goals
Another crucial strategy for surviving through bear markets is matching your money to your goals. You’ll want to ensure your portfolio aligns with your expectations. For instance, you’ll want to ensure you have a high percentage of dividend stocks in your portfolio if you’re looking for a steady stream of passive income. On the other hand, you’ll want to have some growth stocks in your portfolio if your goal is to increase your net worth over time.
Brighter Days Are On the Horizon
You already know that markets have cyclical periods. Sometimes, markets will be bearish, others bullish. The good news is that most bear markets are generally short-lived. The quicker a market enters the bearish territory, the shorter the bearish period. Generally, most bear markets don’t last for more than nine to fifteen months. Let’s use the last known bear market to assuage your fears. The stock market entered the bearish territory following the outbreak of the COVID-19 pandemic in early 2020. Fortunately, the market was only bearish for a mere 33 days.
Diversification is Crucial
Ask any savvy trader or investor, and they’ll tell you the importance of diversification. Diversification is key because you don’t want to put all your eggs in one basket. Ideally, you’ll want to prepare for bear markets by diversifying your portfolio. If you exclusively invest in stocks, consider branching out between mid-cap, large-cap, and small-cap stocks. In addition, refrain from investing in a single industry. Sometimes, industry-specific setbacks occur. The tech industry, for instance, has suffered a serious setback in 2022, and, as a result, not even tech giants are safe from plummeting stock prices. Prepare yourself for such scenarios by diversifying.
Invest in Non-Cyclical Stocks
If you’re still worried about bear markets, consider investing in non-cyclical stocks. These stocks generally outperform the market during bad times. Non-cyclical stocks include consumer staples, utilities, pharmaceuticals, etc.
These companies provide products and services that people need regardless of the economic situation. For instance, most consumer staples companies produce beverages, food items, and personal hygiene products. People will use deodorants and shaving creams whether the economy is booming or declining. Most investors and traders consider non-cyclical stocks safe options in bear markets.
Prepare for the Bear Market with Traders Circle
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About The Author
Charles Miner is a former financial analyst with a storied career. He worked in all the Big Four accounting firms before transitioning to his role as an investment analyst in a Venture Capital firm. Miner holds an MBA in Finance from the University of Chicago, Illinois. He’s a certified CFA charter holder. Miner is currently affiliated with Traders Circle. He enjoys playing the Cello, taking long walks, and debating economics with his friends.
