Strategies to Weather a Bear Market

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Bear markets present a challenge to even the savviest investors. Whether 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.

Create the Right Investment Allocation

The key to making it through a bear market without losing sleep comes from the construction of your portfolio. Your portfolio probably consists of a number of mutual funds, ETFs, stocks, and bonds.

Together, this eclectic mix of investments is designed to achieve a certain goal. You may have a 401(k) plan to fund retirement or a 529 plan for your child’s education. However, ensure your investments are doing what you intended. If you took 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's nothing wrong with that. But you should only invest 100% in stocks if you're 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, but turn conservative once losses start showing up on statements. Avoid the temptation to alter your investments based on what the prevailing markets are doing.

Use Dollar-Cost Averaging

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

For the average investor, when the market is down, you’ll be buying more shares with that money. The more shares you have, the greater the value increase 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 inverse 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.

These investments try to perform the opposite of the underlying market. If stocks start to go up again, these funds are going to go down. Inverse ETFs are 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.

The Bottom Line

With the right approach, patient investors who coordinate their approach with their personal risk tolerance can weather a bear market.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.