A bear market is a financial market where pessimism is dominant and you can see a lot of downturns in different sectors. Market downturns are pretty scary for many investors.
But technical, a bear market happens when a market-wide stock price decline happens. The decline should be 15% to 20%, and it must come with negative sentiment about the market.
How does an investor invest in such a market? Are there any ways to protect oneself from bearish conditions? Check out the following tips.
Check Your Emotions
Investors are prone to high emotions. And when emotions run high, it is often difficult to know whether the fears are founded or are simply the results of the negative attitude.
Over time, the stock market has continued to rise despite of the turmoil and countless other downturns. And because of that, investors are the wiser if they learn separate their emotions from the decision-making process.
Use Dollar-Cost Averaging
When an economic slowdown is happening, one must keep in mind that it’s totally normal for the stock market to have some negative years. It follows the business cycle.
If you are an investor with a long-term time horizon, you may be better to use dollar-cost averaging (DCA), in which you invest the same amount of money at regular intervals regardless of the stock’s current price.
This way, you end up buying more shares at a low price when the market is down. In the longer run, the cost will “average down.” That means you will have a better overall entry price for your shares.
Always have a percentage of your portfolio allocated among stocks, currencies, cash, and other alternative assets.
The manner in which you allocate will depend on many things, such as your goals, time horizon, and risk tolerance. Keep in mind that yours is a unique situation different from what others have.
Doing asset allocation the proper way will let you avoid the negative effects off funneling all your investments into a single basket.
Invest what you can Lose
It’s a rule of thumb: invest only what you can afford to lose. Although it’s important to invest, it’s equally important to secure the money you need for the rent, bills, educations, and mortgage.
In general, it is accepted that investors should not get involved in equities unless they have at least five years of investment horizon or longer. Remember that bear markets can be very destructive.
Invest in Value Stocks
Bear markets can offer huge opportunities for investors, as long as they know an opportunity once they see one.
During a bear market, stock prices are weak and slumping, including those from good companies. The strong and weak get hammered during a bear market.
What that means for an investor is that there’s an opportunity to buy more of the stocks of the good companies. During this time, you can build your position on the stock.
While doing this, it’s also a wise idea to invest in defensive stocks.