We’ve officially entered into a bear market, and some investors, especially those that are new, have started panicking. But, what does that mean for you and your money, and is investing in a bear market a good idea? Here’s what you need to know.
Does a bear market mean a recession?
Not always. A bear market doesn’t necessarily mean we are currently in a recession. However, it can indicate that a recession is looming. Usually, bear markets often go hand in hand with a slowing economy and inflation. Sometimes this means a recession, but sometimes it’s able to bounce back quickly enough to avoid one.
Since 1929, there have been 15 recessions during that time, but 26 bear markets. So as you can see, it’s not uncommon, but it’s not always the case.
What happens in a bear market?
Simply put, a bear market is what happens when the stock market experiences prolonged price declines. This usually means that securities prices fall 20% or more from recent highs. This is also the time that you will notice many investors selling their stocks to recoup costs.
How long does a bear market usually last?
Would you be surprised to know that they don’t last long at all? The typical bear market ends in about 9 months, so roughly less than one year. The longest bear market lasted 18 months, but that was years ago in 1973-1974. It lasted roughly 630 days.
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When was the last bear market?
Unfortunately, the last bear market was in March 2020, amidst the pandemic. So while it can seem like you’ve been consistently losing money, we promise that’s not the case. Due to a worldwide pandemic, people forgoing investing, and more over the last few years, it’s been a bit rough for investors. But, the tides always turn and the market will bounce back, as it always does.
Can you make money in a bear market?
Absolutely! But it may not be right away. In fact, any investor could profit in both bear and bull markets.
The key to making money in a bear market is to match the right investment tools to a bear market.
For example, here are some ways to invest and work around this type of market:
- Index Funds – An index mutual fund tracks the performance of a specific “index,” like the popular S&P 500 Index—as closely as possible.
- Blue Chip Stocks – A blue-chip stock is a stock that comes from a well-known, established company. Blue-chip stocks have a strong history of performance and at times pay dividends.
- Inverse and short ETFs – These investments allow traders to benefit from price declines in major ETFs. But they are NOT as safe in a long-term investment strategy.
Now, don’t worry if you don’t really know what any of this means, especially as a new investor. The main key is to invest over time and prepare for the long haul. Bear markets eventually turn into bull markets. So as long as you stay in the game, you can earn money.
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How do investors make money in a bear market?
According to U.S. News, investors make money in a bear market in a few different ways. These include;
- Automating their investments
- Knowing what they own and rebalancing their portfolios as needed
- Buying low now, and selling high later
These all seem pretty simple, right? And the truth is, they are. Basically, investors make money in a bear market by continually investing, even when other people are panicking.
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Is it good to buy in a bear market?
It can be, as long as you know the risk you’re taking and understand how the market, and your specific pick, work. For example, investing in a company that’s .2 seconds away from going belly-up may not be the best idea. And, investing in real estate when it’s at an all-time high, and interest rates are climbing, probably isn’t the best decision either.
But, by investing in stocks found in defensive sectors, like consumer staples, utilities, and healthcare, or options that pay dividends no matter what, you could walk out ahead.
Best investments in a bear market: What are my options?
Before we jump into this, it’s important to note that you should never invest in something that you haven’t done your own research on, unless you’ve talked and agreed with a financial professional. We are only listing these investments as options that can work well in a bear market.
Best Sectors
The best sectors to invest in include; consumer staples, utilities, healthcare, telecom, energy, financials, information technology, and materials.
Of course, it’s also important to buy stocks from companies that show potential growth and performance. But, to keep things simple, you can also invest in index funds to avoid volatile stocks.
Specific Stocks
There are quite a few stocks that some experts are recommending, even during a bear market. They include;
- Alphabet Inc. (ticker: GOOG, GOOGL)
- Meta Platforms Inc. (META)
- Visa Inc. (V)
- Mastercard Inc. (MA)
- Salesforce Inc. (CRM)
Again, be sure to research these before investing in them. But they do have regular growth and can be safer bets.
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Should I buy cryptocurrency?
We don’t recommend purchasing cryptocurrency, especially during a bear market, unless all of your other investments goals are being met. These can be volatile investments and tend to rise and drop drastically.
If you do choose to purchase cryptocurrency, we suggest balancing it out with safer investments. And of course, don’t spend all of your money on them, never put all of your eggs in one basket.
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How do you prepare for a bear market?
If you’re ready to take a deeper dive into investing, or start investing for the first time, here’s what you need to know to prepare for the bear market.
Save up your emergency fund and keep cash on hand
Yes, it can seem tempting to take your savings and invest it in the market, especially when you know it will rebound.
But, keep this in mind — some bear markets are accompanied by recessions. With that, there are so many different things that can happen during a recession. Unemployment and layoffs are common, and inflation tends to rise even higher during these times. If you’re unsure about your future employment or being able to afford certain items in the future, now is not the time to spend (or invest!) all of your money.
Experts recommend at least three to six months in savings during “regular” times. But as we’ve seen, life can be pretty unexpecting. So we recommend saving up to one year’s worth of expenses, if you can, before continuing to invest.
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Don’t panic
Seeing your account in the red and going down day after day can be emotional and scary. But as we’ve said before, this happens and the market always rebounds.
It’s okay to experience a wide array of emotions. From anger to frustration, from shame to sadness, this is normal. But don’t make financial decisions based on your emotions. Your money isn’t moral. It only does what you make it do. It’s a tool, that’s it.
Instead, focus on investing as a calculated process. Make sure your investments are based on logic and reason. And, keep it simple! It doesn’t have to be complicated. Just keep it up.
Focus on the long-term
Unless you’re retiring tomorrow, you shouldn’t be worried about the short-term effects of a bear market. They all come to an end, usually in less than a year. And, as time has shown, the stock market continually grows to the highest it’s ever been year after year. Just look at it 75 years ago!
No one can time the exact bottom of the market, not even the most experienced traders. But, stay patient and ride it out, and focus more on your long-term financial goals, like retirement and financial independence.
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Diversification is important, so start if you haven’t
It’s no secret that some investments are better than others for certain people. And investments offer different benefits based on what you’re looking for.
For example, investing in stocks that offer dividends can earn you money each month or quarter. But, you can also earn passive income via real estate and REIT investing.
But, ETFs are safe for most investors, because they have high returns overall and focus on balancing out potential volatility.
And, if you’re business savvy, investing in a commercial real estate portfolio could net you some high returns, but is going to be costly up front.
See? Different investment options for different people. But, having a mixture of these investments can mean that you can protect your portfolio and avoid going in the red or losing all of your money. As we said before, don’t put all of your eggs in one basket. Instead, spread them out so that if one basket falls and breaks, you’re still safe and have money invested in your future.
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Decide on an appropriate risk level for yourself
No one can avoid the negative impact of a bear market if they have money invested. And if you’re close to retirement age or close to making big purchase decisions (like buying a house, car, or business), you can expect to feel a bit of a pinch.
But, to avoid a huge dip in investments, you can lower your risk level and choose options that may not make you as much money right away, but won’t lose you a bunch either.
First, always have an emergency fund and cash savings to avoid worrying about the right now or what-ifs. It’s much easier to have money on hand should you need it, than to have to take it out of an investment account (and potentially pay fees and interest).
Next, see if you can rebalance your portfolio to include safer investments for the time being. If you’re using a robo-advisor, this should be as easy as a click of a mouse.
Keep a watchlist of what you want to buy
Of course, you can’t time the market, and we all know this. But, if you have some stocks that you’d love to purchase, but want to make sure the price is within your budget, create a watchlist.
This gives you a better starting point and can help you pay attention to what’s happening with the stocks you like. That way, if they dip, and are in your budget, you can save time and money and pick them up.
Bottom Line
Investing in a bear market doesn’t have to be difficult or scary. It’s all about playing the long game and focusing on what you can do until a bull market comes back.
