Strategies to Weather a Bear Market

bear market strategy

Bear markets present a challenge to even the savviest investors. It doesn’t matter if you have $1,000 in the market or $1 million, losing money hurts. It is during these declining markets your patience will be tested. If fear sets in, you might consider bailing out on your investment plan completely, which can do more damage than anything else.

Creating the Right Investment Allocation

The key to making it through a bear market without losing sleep comes from the construction of your portfolio. You have probably had a portfolio that consists of a number of mutual funds, ETFs, stocks, and bonds. Together, this eclectic mix of investments is designed to achieve a certain goal. It may be part of a 401(k) plan to fund retirement or a 529 plan for your child’s education, but whatever its goal, you want to make sure your investments are doing what you intended.

If you have taken the time to create an investment mix that is suitable for your risk tolerance and investment objective, then a bear market shouldn’t concern you. For instance, if you have a few decades before needing the money, and are an aggressive investor, you might be invested completely in stocks. There is nothing wrong with that, but you should only be invested this way if you understand, and are comfortable with the fact that with significant gains may come significant losses at times. That is just the nature of investing entirely in stocks.

If you find yourself in a situation where you become uncomfortable with the losses in your portfolio, that is a sign that you probably aren’t invested according to your risk tolerance. This commonly happens when investors get overly aggressive in a bull market, and suddenly find themselves turning conservative once losses start to show up on statements. Avoid the temptation to alter your investments based on what the prevailing markets are doing.

Take Advantage of Dollar Cost Averaging

Dollar cost averaging is a technique utilized by most investors who take part in their employer-sponsored retirement plan. A fixed dollar amount is taken out of each paycheck weekly, bi-weekly, or monthly, and invested in. Since the same amount is invested on a regular basis, you’re making investment purchases when prices are high, low, and everywhere in-between.

This is an advantage to the average investor because it just means when the market is down, you’ll be buying more shares with that money. The more shares you have, the greater the increase in value when the market recovers. So, think of a bear market as a sale at your favorite store when you can buy things at a discount.

Profit From Falling Stocks

If you want to take things one step further, you may want to consider investing some money in ETFs or mutual funds that are designed to go up when the market goes down. These investments could then offset some of the losses elsewhere in your portfolio.

The problem is that since these investments try to do the opposite of what the underlying market does if stocks start to go up again, these funds are going to go down. It is a double-edged sword, and trying to time the market with a strategy like this can introduce even more risk to your portfolio than you expected.

Consider Defensive Stocks

Defensive stocks don’t mean companies in the defense sector but refer to generally larger companies that are better suited to withstand a prolonged bear market. Common traits for defensive stocks are companies with strong balance sheets that have been in business for a long time. Smaller and younger companies may not have the financial stability to weather a bear market, so you can minimize the impact of a declining market if you’re concentrated on larger and more stable companies.