5 Things Every Investor Needs to do During a Bear Market
A bear market occurs when stock prices fall. The term arose because when a bear is in a fight, it swipes downwards. Consequently, investing in bear markets calls for caution. Not only are investments riskier but investor confidence is also at its lowest point.
5 Things Every Investor Needs to Do During a Bear Market
- Think Long-Term
- Diversify Your Portfolio
- Take Advantage of Lower Prices
- Set Realistic Expectations
- Assess Your Risk Tolerance
During a bear market, many investors prefer to sell off all their major stocks rather than incur losses. Although this pessimism is not always warranted, it sparks a negative chain of events. As a result, stock market prices may fall as much as 20 percent for as long as two months.
The current bear market in the US occurred on December 24th, 2018. The previous bear market in the United States occurred during the financial crisis, which ran for about 17 months from between 2007 and 2009. During that volatile period, the S&P 500 lost as much as fifty percent of its value.
The following strategies will help you with investing in your 401k, as well as your other bear market strategies. Follow these tips to improve your current bear market position and choice of asset allocation.
1. Think Long-Term
If you have found good, high-quality investments, then there is no reason to assume prices will plunge because of market pessimism. Many legendary companies have endured bear markets and performed well in the long-run.
Now is a good time to cut down on your supply of financial news. Many reputable investors will become fear mongers. They will talk about a stock market crash, predict a recession, and endlessly discuss the market downside of any purchase you may be considering.
Think about long-term investing for any type of market you are in–not just in the stock market– but with bond markets, foreign currency markets, precious metals markets, and more. When moved by emotions rather than rational evaluations, it is easy to lose all hope in your investment portfolio. Perform your due diligence when it comes to researching what equities to buy and then stay your course. Don’t give in to the temptation to join the market panic.
2. Diversify Your Portfolio
If you feel unsure about your portfolio, speak to your financial planner. Find out what you need to know about your selections up to now.
You may have new thoughts about your chosen currency pairs in the FOREX market. It’s possible you do need to unload some holdings that you may have purchased on an impulse. On the other hand, it’s possible that your faith in quality stocks is justified by past performance and all you need do is to stay calm and try not to overthink things.
Remember that a drop-in stock prices does not mean the next Great Depression is coming. Let an advisor serve as a sounding board. Just because a stock is falling right now does not mean that it won’t turn around soon. In fact, it might be a good use of your extra money to buy some high-quality stocks while the price is low. If the company is as solid as you believe, then your blue-chip stock will be able to weather the storm.
The bottom line: Review your portfolio, unload where necessary, keep what is good, and stay open to diversifying your portfolio as necessary.
3. Take Advantage of Lower Prices
Despite the wide array of financial prediction software that professional managers use, they never know exactly when to buy or when to sell. It is almost impossible to predict the top and bottom prices of stocks. There is no secret software or little-known strategy to outsmart the markets.
The best you can do is simply buy stocks because of their demonstrated past performance. While this method does not guarantee investment success, it will definitely improve your chances of making gains because your decisions will be based on sound logic.
Don’t sell just because the price has fallen. Instead, research quality investments, buy assets and hold on to them. This is what the world’s largest institutional investors do–they prepare for long-term returns of their funds rather than react to market volatility.
Besides buying high-value stocks while the price is low, another way of taking advantage of low prices during a bear market is called short selling. This is selling securities that you have borrowed. You will make a profit if the stock price falls even lower. As a seller, you will sell to an open position but then buy it back at a still lower price. The difference in price is how you earn a profit.
4. Set Realistic Expectations
Don’t be disappointed if you only enjoy modest gains. If you did well during the bull market, then it’s easy to feel depressed when the market is down. However, in a bear market, some losses are inevitable.
While no investor wants to lose money, be patient with market corrections. While large losses would suggest that you have made some unwise decisions, small losses may simply be interpreted as validation that you made the right asset allocation and investment decisions in a volatile market. During a bear market, corrections are inevitable. Overpriced stocks are being re-evaluated and will come down to a more realistic price.
As an investor, you have probably become skilled at extrapolation. This is the ability to discern patterns and project future possibilities. While extrapolation can help you seize little-noticed market opportunities, it also has its dark side. If, for instance, the market is down by 10 percent, it’s easy to project that it will drop another 15 percent or even 20 percent in the months ahead.
However, remember that when markets go down, they can also go up. What is happening in the current environment does not always indicate a trend. What happens to a stock now will not always continue to happen. Avoid overthinking and trying to outwit the markets through unfounded extrapolations.
5. Assess Your Risk Tolerance
Risk tolerance is not merely a psychological state. It can be quantified. Use real data to quantify your risk. Usually, a reputable risk analysis tool will ask you questions which will help you get a good idea of your upside and downside.
Once you have your risk score, review your portfolio. If you find that there is a mismatch between your portfolio and your risk score, then adjust your portfolio. The whole idea of doing a risk tolerance survey is to feel comfortable with your current level of risk taking. The goal is to avoid making rash decisions because you’re in a panic over a change in market conditions.
What is the Difference Between Bear and Bull Markets?
Bear and bull markets are the exact opposite of each other. A bear market occurs after investor sentiment drops following a period of time when stock market prices had risen favorably. Bear markets exist during a phase of general pessimism about the economy. It is a time of growing concerns about monetary policy, the economic cycle, and market downturns. The reasons are plentiful: The Federal Reserve raised interest rates, which makes it much harder to borrow money and build a business. Difficult trade talks with China have strained the global economy. There appears to be no end in sight for the government shutdown. Oil prices are expected to go up, and so on.
During a bear market, widespread panic is the norm rather than the exception. Prices plummet. Trading volume decreases. Yields fall. Still, despite how alarming things may look, many legendary investors have taken advantage of prevailing pessimism and low prices to buy up value stocks.
Economists classify two distinct types of bear markets: a secular and a cyclical one. The difference between the two is their length. A secular bear market may last from ten to twenty years. The average rate of return for all investments is low. Although there are rallies during secular markets when indexes or stocks go up for a short period, these gains are difficult to sustain. Eventually, prices will once again go back to a lower level. By contrast, a cyclical bear market can last from weeks to several years.
A bull market is the opposite of a bear market. During bull markets, investor confidence rises, trading activity spikes, and good companies perform well. The term “bull market” is a metaphor because when a bull attacks, it strikes upward against its adversary.
High spirits during bull markets can overvalue certain company stocks. However, during the next bear market phase, price correction to a company’s actual performance occurs and restores balance.
Similar to bear markets, there are also secular and cyclical bull markets. During a secular bull market, which can also last from ten to twenty years, the stock market provides above-average rates of return. The S&P is highly favorable at this time. The cyclical bull markets are also short, lasting weeks, months, or a few years.
Bear Markets Come and Go
A bull and bear market always alternate. You usually have one or the other rather than a mixture of both. These terms describe the overall psychological environment in which investments are made in the marketplace.
When you are in a bear market, it’s easy to believe that democracy is falling and that capitalism is collapsing. Although we have covered at least five ways that you can avoid panicking in our current bear market, the most comforting thing you can do to remain an investor is to take a historical perspective of wall street, the stock market, and a variety of market indicators.
From the start of the twentieth century (1900) to 2013, there have been as many as thirty-two bear markets. The average bear market lasts about ten months. Moreover, bull markets tend to be more protracted than bear markets, which, of course, is always good news for investors. The main thing to keep in mind is that you can make money in a bear or bull market, so don’t give in to panic and overreact when the market fluctuates.