The mention of a ‘bear market’ makes many investors nervous. However, economic downturns are an unfortunate and unavoidable reality of the stock market. Moreover, once stock prices begin to fall, it is impossible to know when they will hit bottom. To protect your investments, experts provide some advice of which strategies and industries to invest in during a bearish market.
What is a Bear Market?
Investors define a bear market as a prolonged drop in market prices, typically lasting two months or longer. This includes declines in either the overall markets and indexes or individual securities. The benchmark of at least a 20% decline from recent highs is the standard indicator. However, prices can plummet much steeper over time. The last time the United States experienced a prolonged bear market was between 2007 and 2009. During this 17 month span, the S&P 500 lost approximately half its value.
A bear market may also come with economic downturns or recessions. Investors look at inflation, interest, hiring, and wage growth rates for signs that the economy is slowing. When this happens, many people become more risk-averse and pessimistic. This is also accompanied by high unemployment rates, little disposable income, and profit losses. Analysts are concerned that the coronavirus pandemic may trigger the next bear market. Between March 11 and 12, 2020 the market plunged into dangerous territory. This has many investors rethinking strategies and preparing to invest during a bearish market.
Defensive Strategies in a Bear Market
It is impossible to predict when the market will bottom out. Some investors choose a more defensive strategy to limit their exposure and curb their losses. One way to do this is to invest in large companies that have shown strong returns in the past. In general, a company’s stock prices are more trustworthy if the business has a long history of operations. Stable companies are typically less affected by economic downturns meaning share prices are less susceptible to greater falls.
Safe Industries to Invest In During a Bearish Market
When choosing which industries to invest in during a bearish market, think about which commodities will be in high demand. Industries that are vital to the needs of businesses and consumers are unlikely to see major losses.These types of investments and companies are in a more stable position and have cash to ensure continued operations. Companies with a stronger financial position are more likely to withstand a bearish market. With a little luck, you may even see portfolio gains in certain sectors.
Some sectors perform well during recessions because of ongoing needs of people and society. You can buy into these ‘defensive stocks’ which include companies that provide essential goods and services. These include businesses which produce staples like food, health care, utilities, real estate, and toiletries. You can also opt into exchange-traded funds (ETF) or index funds in a specific sector. They offer more exposure to stable companies within the industry as well as diversification. As any financial advisor will tell you, diversification is an excellent strategy no matter what the state of the economy.
Buying bonds is another popular move in a bear market because bond prices move inversely of interest rates. So, rising interest rates mean bond prices will decline. Therefore, the longer the bond’s maturity, the greater the fall in prices. Bonds with a shorter maturity fare better when interest rates are rising due to prices. Keep in mind that short-term bonds may still see falling prices, but they are not usually as severe.
Some investors are uncomfortable making short-term predictions of what the market will do. Intermediate-term bonds are a middle-of-the-road approach if you want to avoid the guesswork. Although these bonds have longer maturities, no one can be absolutely certain how inflation and interest rates will behave.
Shopping for Bargains to Invest
Some investors recognize the silver lining of a bear market. It is a good opportunity to buy more stock due to cheaper prices. Dollar-cost averaging can help you mitigate your risks and level off your purchase prices over time. The key to this investment strategy is to make consistent contributions of small amounts of money at regular intervals. It allows you to take advantage of the market dips without putting all your money into a single investment.
When utilizing this strategy, you want to choose stocks that hold value and pay consistent dividends. The dividends you earn from your equities help offset your losses. This helps to balance your portfolio and reduce the impact of economic downturns.
Another way to apply this concept is to buy index funds through your 401(k). If you buy them at regular intervals during a bearish market, you will prosper after the market rebounds. Any shares you bought during the decline will become profitable. The stock market has proven time and again that it always bounces back. It is only a matter of time.
How Long Will the Bear Market Last?
The short answer is: no one knows. Looking back at historical data, bear markets are usually shorter than bull markets. On average, bear markets last roughly 363 days. They also tend to have less drastic fluctuations. The last bear market ended after only a few weeks. However, there is no way to determine if or when stock prices will fall again.
The bottom line is that we are still assessing the economic fallout of the coronavirus pandemic. Unfortunately, no one knows for certain how it will affect markets in the long term. Between widespread closures and rising numbers of employment claims, no one knows how long it will take to recover either.
If stock prices continue to decline, herd mentality and fear may cause people to lose faith in the market and make moves to protect their assets. However, a falling market can also present an opportunity to profit. By utilizing some alternative strategies and industries to invest in during a bearish market, you can cut your losses and protect your portfolio. Who knows, you may even come out ahead.