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Bear Market Investing Strategies

By Michael Flannelly · June 15, 2022 · 7 minute read

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Bear Market Investing Strategies

It can be scary for investors to see their portfolios decline in value because of market turmoil. During periods of steep market declines, known as bear markets, it may seem like the best thing to do is sell to stop further losses. But by doing this, investors could miss out on potential gains if they utilized bear market investing strategies instead.

For investors with a long-term wealth-building goal, it’s important to remember that bear markets are often relatively short. Rather than panic, it can help to look for potential investment opportunities that may help your portfolio survive during bear market downturns.

What Is a Bear Market?

Investors and market watchers generally define a bear market as a drop of 20% or more from market highs. When investors refer to a bear market, it usually means that multiple broad market indexes, such as the Standard & Poors 500 Index (S&P 500) or Dow Jones Industrial Average (DJIA), fell by 20% or more over at least two months.

The term can also be used to describe a specific security. For example, when a particular stock drops 20% in a short time, it can be said that the stock has entered a bear market.

Bear markets are usually associated with economic recessions, although this isn’t always the case. As economic activity dries up, people lose jobs, consumer spending falls, and business earnings decline. As a result, many companies see their share prices tumble as investors shift their risk tolerance.

Recommended: What Is Flight to Quality?

History of Bear Markets

The S&P 500 Index entered a bear market in the first half of 2022. As of June 14, 2022, the index was down 22% from its high on January 3, 2022.

Prior to the most recent bear market, the S&P 500 Index posted 12 drops of more than 20% since World War II. The table below shows the S&P 500’s returns from the highest point to the lowest point in a downturn. Bear markets average a decline of 34%, lasting a little more than a year. Bear markets have occurred as close together as two years and as far apart as nearly 12 years.

Peak (Start) Trough (End) Return Length (in days)
May 29, 1946 May 17, 1947 -29% 353
June 15, 1948 June 13, 1949 -21% 363
August 2, 1956 October 22, 1957 -22% 446
December 12, 1961 June 26, 1962 -28% 196
February 9, 1966 October 7, 1966 -22% 240
November 29, 1968 May 26, 1970 -36% 543
January 11, 1973 October 3, 1974 -48% 630
November 28, 1980 August 12, 1982 -27% 622
August 25, 1987 December 4, 1987 -34% 101
March 27, 2000 October 9, 2002 -49% 926
October 9, 2007 March 9, 2009 -57% 517
February 19, 2020 March 23, 2020 -34% 33
Average -34% 414

How to Invest in a Bear Market

Some investors may be tempted to sell assets during a bear market, content to keep their money in cash while the markets seem to slide. However, there are some investing strategies investors may want to consider rather than avoiding a bear market altogether.

Invest Defensively

The first of these bear market investing strategies 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 generally tend to be risk-averse during downturns and seek safe-haven assets rather than risky ones. Investors will likely put money into value stocks rather than growth-oriented companies.

Recommended: Value vs. Growth Stocks

Investors may shift their portfolios to defensive stocks, like dividend-yielding stocks, large and mature companies, and companies working in sectors with constant demand such as utilities and food. These may be good assets to hold during bear markets.

These investments often provide consistent income through reliable dividend payouts 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

Use Short 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 utilize. When investors short a stock, they sell borrowed shares and hopefully repurchase them at a lower price. The investor profits when the price they buy back the shares is lower than the price at which they sold the borrowed shares.

Alternatively, investors might consider inverse exchange-traded fund (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.

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.

Hold for the Long Haul

During a bear market, it’s not always necessary to do anything special. Investors with a long-term time horizon in mind 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 trends upwards 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%

It also helps that investors have a well-diversified portfolio during any market. Diversifying typically ensures that all of an investor’s eggs are not in one basket, spreading risk around and reducing it overall. One easy way to accomplish this might be to buy structured securities like ETFs or index funds.

One way to hold assets for the long-term and not be too concerned about short-term market fluctuations is to make regular investments regardless of what’s happening, possibly through dollar-cost averaging.

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.

The Takeaway

When the financial markets are in turmoil and your portfolio is in the red, it can be tempting 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. 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.

Investing during a bear market doesn’t have to involve anything fancy. Sometimes it just means making additional investments or finding new ones. And SoFi Invest® can help. With SoFi’s Active Investing platform, investors can trade stocks and ETFs with no commissions for as little as $5.

Open an investment account with SoFi Invest.

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