What is a Bear Market? How to take advantage of it? The following article will discuss the bear market and how you should invest during one.
What Is a Bear Market
Bear markets can be one of the most nerve-racking market events, and you cannot avoid these market downturns.
A bear market is referred to as prolonged declines in prices — generally, a bear market happens when a broad market index drops by 20% or more than its most recent high. Bear markets can occur for individual stocks and markets. For instance, the S&P 500 encountered a bear market on June 13, 2022, by decreasing more than 21%.
We have another characteristic of bear markets, and it is when investors choose to be more risk-averse than risk-seeking. While 20% is the threshold, bear markets can drop much more over a sustained period rather than all at once. This type of bear market can continue for months, even for years.
Investors’ pessimism and lack of confidence are characteristics of bear markets. During the event, investors tend to ignore positive news and sell stocks aggressively, driving prices lower.
The factors causing a bear market may often vary. Still, an economic recession, a sudden paradigm shift in the economy such as shifting to the online economy, pandemics, and wars can be common causes.
Investors should keep an eye on significant economic signs of the bear market, such as a shrinking economy, poor productivity, low disposable income, low employment, and declining business profits.
A secular bear market is defined by a long-term downward trend in the market, which can last for many years. It is associated with factors such as weak corporate earnings and economic stagnation. Within secular bear markets, there may be rallies where stocks or indexes rise for a while, but the gains are short-lived, and prices drop back to earlier levels.
How to Invest During a Bear Market
A bear market doesn’t seem like a good time to invest. You spend $1,000 on the stock. The value is $998.50 the next day. After a week, it is $952. The best way to lose money is to invest during a bad market. So what can we do during the inevitable event? The following four genius strategies will help you to take advantage of this event:
- Make dollar-cost averaging
Dollar-cost averaging is investing a certain amount of money in a specific investment over time. When the investment price is high, you’ll buy fewer shares. When the investment price is low, you’ll buy more shares. For instance, a passive investor might buy $200 monthly in a market-wide exchange-traded fund. This prevents you from investing all of your money in a stock at its high, and it smooths out of your purchase price over time.
Bear markets can be good opportunities if you shift your focus on potential gains rather than potential losses.
- Diversify your holdings in the market
The bear market probably impacts some market segments worse than others. Since it is tough to predict these in advance, you may take preventive action today by diversifying both within the equities market and among different asset types. Having well-diversified portfolio can protect you from huge losses.
Diversifying your portfolio is always a great idea, whether bear markets is happening or not. Think about the funds you’ve set aside for short- or medium-term objectives. Having a diversified portfolio means that you have a wide range of investments.
- Invest in companies that do well during recessions.
Consider the industries that perform well during market downturns if you want to add some stable assets to your portfolio. Consumer goods and utilities perform better during recessions than other sectors, such as the industry or consumer discretionary sectors.
- Stay the course
Sometimes it can be tempting to watch headlines and news about stock market crashes and listen to friends speak about selling everything off. However, investing is all about having long-term decisions. What you do during the downturns will define your performance over time. The most important thing you can do during a bear market after you have re-assessed what you own is to wait it out.
Conclusion
Bear markets can be scary; fortunately, they do not usually last long. This period can be challenging even for professional investors. This means that picking high-quality investments to keep them for a long time is the most crucial thing an investor can do. They should also always maintain a close eye on any positions that may require extra attention, such as growth stocks and possibly volatile investments.
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