Don’t be afraid of a bear market, here’s what to do

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Stock charts make it easy to see how the market is doing at any given time — green means up, red means down — and during a bear market it’s usually red as far as the eye can see.

For many people, the color red means one thing: stop. But quitting investing in general is a bad idea when the market gets scary. Even worse ? Selling stocks out of fear.

It takes determination to keep investing during a bear market. These market events, defined as declines of at least 20% in asset prices from a recent high, will likely occur a few times in your lifetime as an investor. Over the past 50 years, the S&P 500 has seen six bear markets, according to data from Yardeni Research. (Confused? Learn about bear markets.)

Since bear markets are somewhat inevitable, here are some tips for getting the most out of investing during these times.

Make Averaging Your Friend

Suppose the price of a stock in your portfolio drops 25% from $100 to $75 per share. If you have money to invest and want to buy more of these stocks, it may be tempting to try buying when you think the stock price has fallen.

The problem is, you’ll probably be wrong. This stock may not have bottomed out at $75 per share; instead, it could drop 50% or more from its peak. This is why trying to bottom out (or “time” the market, as many people call it) is risky business.

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A more conservative approach is to regularly add money to the market with a strategy known as averaging. This helps smooth out your purchase price over time, ensuring you don’t pour all your money into a stock at its high (while profiting from market declines).

There’s no doubt that bear markets can be scary, but the stock market has proven that it will eventually rebound. If you change your perspective, focusing on potential gains rather than potential losses, bear markets can be good opportunities to buy stocks at lower prices.

Diversify your holdings

Speaking of buying stocks at lower prices, increasing the diversification of your portfolio – so that it includes a mix of different assets, including stocks, bonds and index funds – is another valid bear market strategy. or not.

During bear markets, all companies in a given stock index, such as the S&P 500, typically fall, but not necessarily by similar amounts. This is why a well-diversified portfolio is essential. If you’re invested in a mix of relative winners and losers, it helps minimize your overall portfolio losses.

To see: Why denial could be a smart investment strategy

If only you could know the winners and losers in advance, right? Since bear markets generally precede or coincide with economic recessions, investors often favor assets during these periods that offer a more reliable or steady return, regardless of what is happening in the economy.

Often referred to as a “defensive” strategy, such an approach can mean loading into the following types of actions:

  • Equities of non-cyclical companies. These companies do not see a sharp drop in demand if the economy is struggling, because they sell essential goods or services like food (sold in a grocery store), healthcare or utilities, for example.
  • Dividend-paying stocks. Even if stock prices do not rise, many investors still want to be paid in the form of dividends. This is why companies that pay above-average dividends (including utilities) will attract investors during bear markets.

And speaking of stability, bonds are also an attractive investment during turbulent times in the stock market because their prices often move in the opposite direction of stock prices. Bonds are an essential component of any portfolio, but adding more money to these assets can help ease the pain of a bear market.

Focus on short-term strategies

If you can’t stand watching your portfolio value plummet during a bear market, it may be best to ignore it. That’s right, don’t log into your account – let it be.

In a bear market, as in normal times, keep adding money to your retirement vehicle, a 401(k) or IRA; experts recommend a goal of around 15% of your gross income. With savings beyond this amount, it’s perfectly acceptable to focus on short-term goals. If you have a life event coming up in the next five years — buying a house, having a baby, sending a kid to college, or retiring — it’s best to keep that money out of the stock market anyway. .

Short-term strategies are good for that: the short term. In 2018, for example, high-yield savings accounts outperformed major equity indices, most of which ended the year in negative territory. But the stock market remains the long-term winner, with the S&P 500 offering average annual returns of around 10%.

When saving in the short term, make sure your vehicles are performing competitively. Here are some current ranges:

  • CD (certificates of deposit). Potential annual return: 2% to 3%.
  • High Yield Savings or Money Market Accounts. Potential annual return: 1% to 2%.
  • Peer-to-peer lending. Potential annual return: 3% to 8%.
Be patient

Bear markets test the resolve of all investors, including professionals. Although these periods are hard to bear, history shows that you probably won’t have to wait too long. Bear markets tend to be shorter than bull markets (1.4 years on average versus 9.1 years) and less severe (with average cumulative losses of 41% versus average cumulative gains of over 470% ), according to data compiled by First Trust Advisors.

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