You’ve probably heard about how you should invest in a market downturn. Heck, I know the news is focusing more than ever on market volatility. The problem is that most people don’t know what to do with this information on a real level. In other words, they can’t really explain HOW they would invest in a downturn. Well, I’m here to give you the basic steps on how to start Investing in a Bear Market and make a profit .
What defines a bear market?
A bear market is a prolonged period in which prices decline in the stock market. Several factors contribute to a bear market, including a weak or slowing economy and shocks such as pandemics or war. On the other hand a recession is defined as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The National Bureau of Economic Research’s definition of a recession is more subjective than the conventional “two consecutive quarters of decline in real GDP.”
Does being in a bear market mean we are in a Recession?
Although all bear markets (declines of 20% or more from a recent peak) reflect some degree of economic stress, surprisingly only few are actually linked to recessions. Of the 26 bear markets since the late 1920s, only nine were associated with an economic downturn. Despite this, if the U.S. economy contracts in the next year or two, it would mark the shortest expansionary phase of a business cycle since 1981. Which was also a time of high inflation.
How Long Do Bear Markets Last?
The length of a bear market depends on which formula is used. According to investment analysis firm Seeking Alpha, the average length of a bear market since the 1920s has been 289 days, or about nine and half months. The longest bear market since 1950 lasted 929 days; the shortest was 33 days. Since 2000, there have been only three bear markets—not including this one. One of those was history’s shortest. Bear markets, even the long ones, have always given way to bull markets.
What are the main characteristics of a bear market?
- Declining equity prices – Stock prices dip below the book value of their companies. When consumers buy less, companies lose money and begin to cut back on hiring, causing unemployment to rise.
- Investors often experience fear and pessimism – Investors tend to sell shares, depressing prices. They also move money toward less volatile assets such as Treasury bills and investment-grade bonds.
- Investor sentiment turns negative – The consensus is that the market’s growth has halted and won’t change anytime soon. Investors move money to safer and steadier assets, like Treasury bills and investment-grade bonds.
- Companies make less money – Consumers are buying less and becoming more cautious about spending. This has led to a decline in corporate earnings, profits, and investment. In turn, firms have to lay off workers, cut back production, and curb research and development.
How to Make Sense of the Current Recession Scare
In June, the equity market reached bear market territory as a result of rising interest rates, stubbornly high inflation, and growing pressure on corporate profits. The next step is to assess whether the Fed can pull off a soft landing. As Fed Chair Jerome Powell recently conceded, at least a soft-ish landing.
Powell says it’s still plausible that the U.S. economy is overheated and under-supplied, which could cause inflationary pressures that are tough for the Fed to tame without causing collateral damage. On the bright side, the next recession could be relatively mild because consumer finances are in remarkable shape and corporate balance sheets also appear sound. There are scant indications of a banking crisis like the one in 2008.
The Federal Reserve is draining the monetary pool by raising interest rates, supply chains are still snarled due to a number of factors, and bringing down inflation will slow if not crash the economy. However, the best course of action is to stay the course and dollar-cost average if prices fall further. This too shall pass, though probably not as quickly as anyone would like.
How should you be investing in a bear market?
- Make use of dollar-cost averaging – Some investors might be tempted to try to buy low, when a stock has cratered. But this isn’t the best strategy. It can be smarter to regularly invest in the market through a strategy known as dollar-cost averaging: consistently adding money over time and in roughly equal amounts. This helps smooth out your purchase price over time, ensuring you don’t pour all your money into a stock at its high — while still taking advantage of market dips.
- Diversify your portfolio – During bear markets, you can spread the risk of your portfolio by investing in a mix of different assets. If only you could know which stocks were going to do well before they did well! Because bear markets coincide with economic recessions, investors often favor assets during these times that deliver a steadier return irrespective of what’s happening in the economy.
- Focus on long Term Investments – While bear markets can be tough to endure, they are often followed by bull markets. If you’re investing for retirement, you may not even remember the bear markets of your youth. Still, it can be hard to resist selling investments during a bear market. If that’s the case for you, consider talking to a robo-advisor or financial advisor about managing your investments so that you don’t feel tempted to sell them when markets plummet.
Final thoughts on bear markets
Bear markets can be scary — but investors shouldn’t panic. The average bear market lasts less than a year, and simple strategies such as dollar-cost averaging, diversification, investing in relatively recession-resistant sectors and focusing on the long-term can help mitigate their effects.
