Many investors experience panic when they hear the term “bear market.” However, these severe market downturns are inevitable and frequently only last a short while.
When the prices of a large number of securities decrease steadily over time, it is said to be in a bear market. A bear market can be identified by an average overall market decline of 20% or more during a two-month period.
Bear markets typically happen when there is a general sense of doom in the economy. However, for those who apply the appropriate financial tools, there are opportunities to make money among the wreckage. Here are some strategies for making money in bear markets:
Dollar-cost averaging
Let’s say a stock in your portfolio sees its price fall by 25%, from $100 per share to $75 per share. It can be tempting to try to buy when you think the stock’s price has fallen if you have money to invest and want to purchase more of this stock. Unfortunately, you’ll probably be in error. That stock might not have fallen 50% or more from its high.
A more conservative course of action is to consistently contribute funds to the market using a technique called dollar-cost averaging. You consistently invest money over time and in about equal amounts when you use dollar-cost averaging. This makes it so you don’t invest all of your money in the stock at its peak and smooths out your buying price over time (while still taking advantage of market dips).
Invest in industries that do well during economic downturns.
Take a look at the industries that typically perform well during market downturns if you want to add some stabilizing assets to your portfolio. Consumer goods and utilities typically fare better in bad markets than others.
Through index funds or exchange-traded funds that follow a market benchmark, you can invest in particular industries. For instance, investing in a consumer staples ETF can expose you to businesses in that sector, which is more stable than others during recessions. Because each fund owns shares in numerous firms, investing in an index fund or ETF offers greater diversification than buying a single stock.
Keep the long term in mind.
Establishing a long-term plan now is an excellent approach to make sure that you can withstand volatility in the future, despite the fact that looking at current stock performance may make it seem like a scary moment to start investing. This is crucial because volatility is common.
The bad markets you’ll experience if you’re investing for a long-term objective, like retirement, will be eclipsed by bull markets. You shouldn’t invest the money you need for short-term goals, often those you intend to accomplish in fewer than five years, in the stock market.
Diversify your holdings
During bear markets, all the companies in a specific stock index, often decline, but not always by the same percentages. A well-diversified portfolio is essential because of this. The overall losses of your portfolio are reduced if you have a mix of relative winners and losers in your portfolio.