In mid-March, a fear-induced global sell-off triggered by the COVID-19 pandemic ended the longest bull market in U.S. history — leading us into our first bear market in 11 years. Bear markets are commonly defined as a decline of at least 20% from the market’s high point to the low during the selloff.
If you compare your investment portfolio today to what it looked like at the beginning of the year, you are likely to be unhappy with what you see. But there’s also a potential upside to bear markets, as you may be able to capitalize on the fact that stock prices have come down across the board. Investing in a bear market is possible, but it’s important to approach it with the right mindset. Here are a few tips to keep in mind:
Diversify your portfolioDuring a bear market, your focus should generally be on preservation. Diversification can help you accomplish this. Essentially, diversification is just a fancy word that means “don’t put all your eggs in one basket.” While it’s true that the trend is downward during a bear market, not all stocks will go down at the same rate. It’s possible that some might even thrive.
Review your portfolio to see if it is properly balanced between stocks, bonds, and cash that align with your goals, time horizon and your ability to manage risk. By having a portfolio that covers various sectors, you can mix your winners and losers to help reduce overall losses.
Keep a level head
Bear markets are painful but temporary. The U.S. stock market has recovered from every previous bear market. Of course, the past is no guarantee of future results, but historically even the worst markets have been temporary dips in a general march higher for stocks.
If you are in a well-diversified portfolio, your bear market experience will be very different from that of the S&P 500. Sticking to your plan is key, so resist the urge to change the risk profile of your portfolio or make sizable shifts out of stocks or into cash.
Don’t attempt to time the marketRather than aim to buy stocks when they’re at a so-called low during a bear market, employ a strategy called dollar-cost averaging. Dollar-cost averaging involves making regular investments of consistent dollar amounts over an extended period of time. This allows you to build a portfolio and help protect against wild fluctuations while continuing to accumulate assets. It’s a smart strategy in general, but one that can really pay off during a bear market. After all, it’s not about timing the market, it’s about time in the market.
Look to the futureIt’s hard to predict how long a bear market will last, and in some cases, they can be quite drawn out. As such, don’t invest in a bear market with the hopes of buying low and getting rich within the year. That’s unlikely to happen. Instead, take a long-term approach to investing, and assume that any stocks you buy now are stocks you’ll continue holding for a number of years.