One of the few constants in the investing world is the cyclical nature of markets. They fluctuate up and down like the ocean tides. When broad market indexes fall by 20% or more from their recent highs, we often see the emergence of bear markets, marked by a protracted downward trend in investment prices. While this precipitous decline may strike fear in the hearts of investors, intelligent traders know that bear markets often present unique investment possibilities.

In this article, we're headed down the road of the bear market and how you can invest in it. We will be discussing some strategies you can use in bear market investing, and we hope it'll be helpful to you!

Bear Market: Duration and Causes

Typically, bear markets rear their heads just before or after an economic recession. They are often accompanied by investors' heightened pessimism and low confidence, leading to a general selling frenzy that further pushes down prices. Key economic indicators, such as hiring trends, wage growth, inflation, and interest rates, usually act as barometers of an impending bear market, signaling potential corporate profit declines and subsequent stock sell-offs.

According to Invesco's data, bear markets are typically shorter (around 363 days on average) and less severe (with average losses of 33%) than their bull counterparts. However, their inception could portend higher unemployment rates and potentially more challenging economic times ahead.

Strategies for Bear Market Investing

While understanding bear market investing is one thing, knowing market investing strategies can be a complete game changer for investors. Some of the major market investing strategies are:

Dollar-Cost Averaging

While the temptation to buy a slumping stock may be overwhelming, timing the market bottom can be risky. Instead, a more prudent approach would be to adopt a dollar-cost averaging strategy. Investing regular, roughly equal amounts of money over time helps to even out your purchase price, ensuring you capitalize on market dips without risking it all at the stock's peak.

Diversification

In the throes of a bear market, almost all companies within an index like the S&P 500 tend to tumble, albeit not at the same rate. Diversifying your portfolio by investing in a mix of assets can therefore act as a protective shield, minimizing your portfolio's overall losses. It's advisable to include assets that deliver steadier returns during market downturns. These could include dividend-paying stocks, which remain attractive as they offer returns even when stock prices aren't rising, and bonds, especially high-quality, short-term ones, as their prices often move inversely to stock prices.

Bank on Recession-Resilient Sectors

Investing in sectors that tend to weather economic downturns can be a smart move during bear markets. These are often sectors catering to essential consumer needs such as gas, groceries, and healthcare. Sector-specific index funds or exchange-traded funds (ETFs) can offer a stable investment route, providing exposure to many companies within these relatively recession-resistant industries.

Adopt a Long-Term Outlook

Bear market investing can indeed be challenging, but history suggests that the market's recovery may not be too far off. If you're investing with long-term goals in mind, such as retirement, the highs of bull markets should more than compensate for the lows of bear markets. Don't sell your investments just because the market is down; doing so could ruin your portfolio. If you find yourself unable to resist this temptation, it may be time to look into the services of a robo-advisor or a human, financial advisor.

It's smart to take stock of your financial objectives and investment approach during a bear market. If your assessment is spot on, you may decide to rebalance your portfolio at a time when capital gains are fewer than during a bull market.

FAQs

What is the Difference Between Bear Market vs. Bull Market?

Bull markets are the antithesis of bear markets. While bear markets are defined by a 20% or more drop in stock prices, bull markets signify a rise of 20% or more. The former is marked by investor pessimism, and the latter by optimism and an upward price spiral.

Can I Predict a Bear Market?

While some indicators, such as falling interest rates, may hint at an impending bear market, accurate prediction is elusive. Rather than trying to outsmart the market, investors should focus on having a well-diversified portfolio and ensuring they're not over-exposed to near-term financial needs.

Is Bear Market and a Market Correction different?

Market corrections are milder versions of bear markets, characterized by brief, shallow drops in stock prices ranging from 10% to 20%. Not all corrections turn into bear markets, though. For instance, of the 22 market corrections between 1974 and 2018, only four morphed into bear markets.