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You likely panic when you hear bear market, as do most investors. But what if you could be a successful bear market investor?
It's possible with the right investment strategy and support. All financial markets have ups and downs; it takes understanding how they work, how to read past performance, and knowing how to stay invested that helps you navigate bear markets the best.
Here's everything you must know about how to invest during a bear market.
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Defining Bear Market
A bear market occurs when investment prices drop drastically. By definition, bear markets occur when the market downturn is 20% or more than its previous state. A bear market can occur for one stock or the entire stock market.
Bear markets might seem bad, but they are a part of the economic cycle and should be understood. Moreover, bear markets tend to offer great investment opportunities if you know how to use bear market investing strategies and make the most of your portfolio.
Bear Market Phases
The bear market has four phases:
1. High Prices
In the first bear market phase, asset prices are high, and many investors feel good about the market. As the first phase ends, investors' feelings change as they change their investment strategy and sell their assets.
2. Stock Prices Fall
In this phase, stock prices fall dramatically, and trades decline. In addition, the threat of economic recessions begins, and investors start to feel pressure to sell their assets.
3. Speculators Enter the Market
In this phase, speculators enter the market and increase trading activity. This causes some stock prices to increase
4. Stock price declines slow
In the last phase, stock prices still fall, but not as fast. Investors start feeling more optimistic about the market downturn and begin to hope that a bull market is around the corner.
Bear Market Causes
The bear market causes aren't always something investors can point their fingers at, but most often, it's due to economic recessions.
Experienced investors watch the economic indicators carefully to watch for any impending trouble. For example, they look at unemployment rates, wage growth, and interest rates. They pay attention when companies are tightening the reins, and many investors use this time to sell assets in anticipation of declining markets.
As investors sell their investments, the market downturn begins. The more stocks that are sold, the more the market falls.
Bear Market Real-Life Example
The 2000 Dot com bubble is a good example of a bear market in real life. It started in the 1990s with a dramatic increase in stock valuations of technology stocks in anticipation of the rise of internet-based companies.
NASDAQ grew 4,000 points between 1995 and 2000, but the bubble burst, and the stock market entered a bear market in 2001 and 2002. The NASDAQ fell 4,000 points then, and almost every dot-com stock failed. Many technology stocks suffered too, and it took 15 years for the stock market to recover.
How Long Bear Markets Can Last
Bear markets often last almost a year. The average bear market is 289 days long versus the average bull market, which lasts 991 days. Bear markets have an average loss of 36%, even in the worst times, whereas bull markets gain 114% on average.
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How to Become a Bear Market Investor
To become a bear market investor, you must resolve to have a long-term investment strategy. No market happens overnight, and bull and bear markets turn themselves around eventually. The key is not stalking your portfolios and making emotional investments. Instead, commit to long-term success and use these tips.
To invest during a bear market, commit to regularly investing. Bear market declines don't last for only a few days; they last almost a year. So don't focus too much on the stock prices or determine if/when they will be lower prices. Instead, invest when you can and use dollar cost averaging to your advantage.
Think Long Term
Most importantly, think long-term during a bear market. Don't assume this is it, and you must get out now. Statistics show that bear markets turn around. When you're in bear market territory, chances are there will be a bull market around the corner, depending on how long the market has been a bear market. You aren't investing for tomorrow; instead, you're investing for longer-term goals, so let your money sit.
Diversification During a Bear Market
Most importantly, you must have a diversified portfolio during any market, especially a bear market. This means dividing your funds between stocks, bonds, and other investments.
Put some of your capital in the stock market, but make sure to diversify your investments. Choose stocks from different industries, and include common and dividend-paying stocks. Even if the market risk is high, companies will still pay dividends to their shareholders if they perform well.
Balance your portfolio with conservative bonds. Bonds offset the risk of the stock market. While you don't want all your money in bonds because the return isn't nearly high enough, it can offset the losses you might experience during a bear market. So invest your money in both bonds and stocks to balance your risk.
Investing in Well-Performing Sectors
Focus your investments on sectors people need, no matter the state of the economy. Food, gas, utilities, and clothing are necessities, as is healthcare. Invest in these industries, which are less likely to feel such dramatic market downturns.
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The key is to have long-term resilience. Don't give up. Yes, it's disheartening to see the market swings and your portfolio decline, but market history shows a new bull market is always around the corner.
Working With a Financial Advisor or Financial Planner During a Bear Market
When working with a financial advisor during a bear market, it's important to clarify your intentions. First, find a financial advisor with the same values and theories you do so you are both on the same page.
Next, follow the advisor's lead when discussing your investments, market timing, and how to play the stock market during the bear and bull markets. Finally, find an advisor you trust with experience in bull and bear markets for the most lucrative advice.
Invest During Bear Market FAQs
What Are Signs a Bear Market Is Coming?
A major stock market decline is the most common sign that a bear market is coming. You might notice several stocks falling or hear on the news that an entire index had a dramatic loss overnight. Another good indication is falling interest rates. When the Federal Reserve lowers interest rates, it's usually a sign that a recession is coming.
How Do You Short Sell in a Bear Market?
To short-sell stocks in a bear market, you borrow stocks when they are priced high, selling them for a profit. When prices drop, you then wait for the bear market to buy back the stocks and return them to the lender.
Is There a Difference Between Bear Markets and Market Corrections?
Market corrections mean the market is correcting itself in the short term, usually a couple of months. As a result, there isn't a never-ending decrease in prices. Instead, it's a quick turnaround to fix the issue rather than causing panic-stricken fear in all investors.
What Is a Put and Inverse ETF in Bear Market Investments?
A put option allows sellers to sell stocks at a specific price. However, they aren't obligated to do so, and if not executed by the expiration date, the put expires, leaving the investor with the loss of the premium paid for the option.
Inverse ETFs work opposite to standard ETFs. Rather than tracking or mimicking the market, inverse ETFs do the opposite of what the market does.
What Is the Difference Between a Bear Market vs. Bull Market?
It's important to understand the bear market vs. bull market to invest correctly. In a bull market, stock prices rise drastically, and in a bear market, they fall. But, like bear markets, bull markets occur when most stock prices increase at least 20%.
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Should You Invest During a Bear Market: Final Thoughts
Bear markets can be scary, but knowing how to be a bear market investor is the key to long-term success. Bear markets last less than a year and have an average loss of 33%. While it can be shocking to see your portfolios change so much in a short time, it doesn't last forever, and if you manage your risk tolerance, you can use the bear market to your advantage.