8 Smart Investing Strategies for a Bear Market

While it may seem counterintuitive to invest during a bear market — a prolonged market decline, typically of 20% or more — there can, in fact, be investment opportunities during downturns, if you know where to look and what strategies to use.

By knowing which bear market investing strategies might make sense, it’s possible to mitigate losses and possibly realize some gains. Also, for investors with a long-term wealth-building goal, it’s important to remember that bear markets are often relatively short. So, rather than panic, it can help to look for potential investment opportunities that may be beneficial.

1. Focus on Defensive Stocks and Sectors

One bear market investing strategy involves buying assets that may increase in price when the overall financial markets decline. Many factors influence which investments perform well during a bear stock market.

Investors may shift their portfolios to defensive stocks, to bigger and more mature companies, and companies in sectors with constant demand, such as utilities and food. These may be good assets to hold during bear markets because these stocks tend to hold steady, even in a downturn, as people need to eat and power or heat their homes.

Defensive investments may provide consistent income through dividend payouts (more on that below) while experiencing less volatile share price action during market downturns. Buying assets like these at the beginning of a downturn can be beneficial.

Recommended: The Pros and Cons of a Defensive Investment Strategy

2. Consider Dollar-Cost Averaging

Using a dollar-cost averaging strategy isn’t limited to bear markets, but it may be useful if the market does experience a downturn.

Dollar-cost averaging involves investing a set dollar amount at regular intervals (e.g., weekly, monthly, quarterly), regardless of whether the markets are up or down. That way, when prices are lower you buy more; when prices are higher you buy less. Otherwise, you might be tempted to buy less when prices drop, and buy more when prices are increasing, based on your emotions.

For example, if you invest $100 in Stock A at $20 per share, you get 5 shares. The following month, say, the price has dropped to $10 per share, but you stay the course and invest $100 in Stock A — and you get 10 shares. Now you own 15 shares of stock A at an average price of $13.33.

💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.

3. Maintain a Long-term Perspective

During a bear market, it’s not always necessary to do anything special. Investors with a long time horizon sometimes choose to hold on and stay the course, even when a portfolio declines in value. Taking a long-term perspective may pay off well over many years, as the market as a whole tends to trend upward over time.

For example, the bear market that began in December 2007 was over by March 2009, lasting about a year and a half. But the bull market that followed lasted almost eleven years; the S&P 500 index recouped its losses from the bear market by March 2013, and from March 2009 through February 2020, the S&P 500 increased just over 400%.

4. Diversify Your Holdings

It also helps if investors have a well-diversified portfolio during any market. Diversifying typically ensures that all of an investor’s eggs are not in one basket, which can help mitigate the risk of loss, since you’re not overexposed in one sector or asset class.

One easy way to accomplish portfolio diversification might be to buy structured securities like ETFs or index funds.

5. Look Into Dividend-paying Companies

One way to invest during a bear market is to focus on stocks that provide income, i.e., dividend-paying stocks. Typically, these companies are bigger, more established, and growth oriented.

A dividend is a portion of a company’s earnings that is paid to its shareholders, as approved by the board of directors. Companies usually pay dividends quarterly, but they may also be distributed annually or monthly.

Most dividends are paid in cash, on a per-share basis. For example, if the company pays a dividend of 50 cents per share, an investor with 100 shares of stock would receive $50.

Many investors who rely on dividend-paying stocks do so as part of an income investing strategy — which also serves investors during a downturn.

6. Build a Watchlist of Quality Growth Stocks

While value stocks are generally considered undervalued relative to their actual worth, growth stocks are shares of companies that have the potential for higher earnings, often rising faster than the rest of the market. In addition, growth stocks have shown historic resilience in market downturns.

These companies tend to reinvest their earnings back into their business to continue their company’s growth spurt. Growth investors are betting that a company that’s growing fast now, will continue to grow quickly in the future.

To spot growth stocks, investors look for companies that are not only expanding rapidly but may be leaders in their industry. For example, a company may have developed a new technology that gives it a competitive edge over similar companies.

7.Study Advanced Strategies (like Shorting)

Bear markets may open up opportunities to learn new investing strategies.

One of the more sophisticated bear market trading strategies is placing bets that will rise in value when other investments lose value. This might involve, for example, purchasing put options contracts on stocks that may decline in value. A put option allows investors to benefit from falling share prices.

Shorting stocks to speculate on falling stock prices is another strategy investors can employ. When investors short a stock, they sell borrowed shares and hopefully repurchase them at a lower price. The investor profits when the price they pay to buy back the shares is lower than the price at which they sold the borrowed shares.

Alternatively, investors might consider inverse exchange-traded funds (ETF) as the overall market declines. An inverse ETF tracks a market index and, through complex trading strategies, looks to produce the opposite result of the index. For example, if the S&P 500 index declines, an inverse ETF that tracks the index will hopefully increase in value.

Note that the SEC has issued a warning about inverse ETFs, however, as they do introduce risks. Specifically, these products are designed to meet their goals within a day, and holding them longer could lead to losses.

However, using put options, inverse ETFs, and other short strategies involves many nuances that may be complicated for some investors. They are very risky trading strategies that could compound losses if the bets do not work out. Interested investors ought to conduct additional research before considering this strategy.

8. Consider Laying Low

If none of the above bear market strategies appeals to you, there is always the option of “playing dead,” as the saying goes. This derives from the advice given to those in the wilderness who might face a live bear: to not panic or do anything rash or risky.

In the same way, some investors believe the best way to handle a bear market is to stay calm, moving a portion of your portfolio into more secure and stable investments like Treasury bills, bonds, and money market funds.

3 Common Mistakes to Avoid in a Bear Market

While bear markets may be advantageous in that they open up opportunities, there are some tried-and-true mistakes that investors can make, too. Here are some examples.

Mistake 1: Panic Selling

Panic selling is exactly what it sounds like: Investors see the market decline, fear that they’re going to lose some or all of their money, and sell their holdings in an effort to salvage what value they can. It’s an emotional response, and for people who don’t have much appetite for risk, understandable.

But the market has, historically, always bounced back. By selling, you’re locking in your losses. That is, you’re guaranteeing that you’re losing money, rather than waiting things out, and letting the market recover.

Mistake 2: Trying to Perfectly Time the Bottom

You’ve likely heard the saying: Time in the market beats timing the market. That’s because it’s pretty much impossible to effectively time the market. If you’re trying to get a sense of when the market has “bottomed out” and will start to appreciate once again, you’ll probably be wrong. So, it’s likely best not to even try, and instead, stick to your plan or strategy.

Mistake 3: Abandoning Your Plan

On that last point, sometimes a down market scares investors so much that they throw their investment plan or strategy out of the window. That’s another mistake — if and when the market recovers, you’ve thrown your portfolio into flux, and lost sense of what you’re trying to do.

Again, try to remain detached and unemotional as it relates to bear markets or downturns. They happen. It’s a part of the market cycle. If it’s too much for you to bear (ha!), utilize some strategies to help lower the risk profile of your portfolio — it may help you sleep at night.

Bear Market Investing vs Bull Market Investing

For those investing for the long term, the only real difference between a bear market and a bull market will be a temporary dip in the value of their portfolio. The main goal will be to stay the course. As mentioned, long-term investors often make regular, recurring purchases of financial assets.

During bull markets, a common investment strategy is to buy and hold. This tends to work because bull markets are characterized by most asset classes rising in unison.

However, investors may have to be a little more active with their portfolios during bear markets. Some investors choose to increase the amount of money they put into their investments during market downturns. Their overall strategy remains the same, but buying more assets at lower prices lets them acquire a larger number of assets overall.

For those with a higher risk tolerance looking to make short-term gains (often referred to as speculators), a mix of strategies might be employed. Speculators may look to short the market using puts or inverse ETFs, or research assets likely to increase in value due to current bear market trends.

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When the financial markets are in turmoil and your portfolio seems to be in the red, you may be tempted to panic. You may want to sell off your assets to mitigate further losses, content to pocket the cash. However, this sort of strategy may be short-sighted for most investors as it locks in your losses.

Also, you may be setting yourself up to miss a potential rally by getting out of the markets. After all, bear markets are often relatively short-lived and are followed by bull markets.

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FAQ

Should I sell all my stocks in a bear market?

You could sell your stocks during a bear market, but doing so could lock in your losses. Waiting for the market to rebound, assuming it does, could lead to a positive return over time.

Is it actually a good time to buy stocks during a bear market?

It may be a good time to buy stocks during a downturn as they’re effectively “on sale,” this is sometimes called “buying the dip.” Since the market has, historically, always rebounded, it may be a fruitful long-term strategy.

How can I protect my 401(k) during a bear market?

There may not be a way to protect your 401(k) or investments during a bear market, but if you’re feeling panicked, you can utilize some strategies to lower risk and volatility within your holdings, such as reallocating assets and further diversifying.

What are the safest investments during a market downturn?

There’s no such thing as a safe investment, but some investments that tend to have lower risk profiles include bonds, Treasurys, and even certain commodities like precious metals.

How much cash should I have on hand in a bear market?

There’s no single answer to how much cash you should have on hand during a bear market, so the best response may be “as much as required to make you comfortable.”

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S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

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