It can seem daunting to invest during a bearish market. It doesn’t need to be that way if you prepare ahead of time.
When the economy is bad or there’s a financial crisis the markets go down, the news media creates panic headlines and everyone tells you to sell. You don’t know what to do.
Losing money is common for all investors, whether they are new or experienced.
Here I will discuss more about the bear market, how to stay on track with your investment and how to survive it.
Table of Contents
What is a Bear Market?
Bear Market vs. Bear Market vs.
Bear Market vs. Recession
Bear Markets in History
What is a bear market?
How to Survive a Bear Market
Final Thoughts
What is a Bear Market?
A bear market is simply when stocks have dropped at least 20% from their recent high. It is also impossible to tell when the market will recover.
Many new investors try to time market movements, but this rarely works. It’s possible to get lucky every now and then, but this is not recommended.
Sometimes a bearish market is caused by certain economic triggers. Other times, it can be difficult to determine what’s causing investors to panic. A bear market can be caused by:
Anticipation that a recession is imminent
Slowdown in the growth of business
Slow growth in employment/increased unemployment
Federal Reserve policy changes
A bear market can last anywhere from a month to two years. It could last for a few months, or even two years. When you invest wisely, the volatility of the markets won’t bother you as much.
Bear Market vs. Bear Market vs.
Stock market corrections are different than bear markets. A correction is defined as a decline of 10% or more from the most recent index peak.
Corrections may occur once or twice a year but usually bounce back fairly quickly.
Bear Market vs. Recession
You’ll most likely see bear markets in conjunction with a recession. However, there is one slight difference.
When the bear market affects consumers, it can lead to a recession. A recession can occur when the effects of investors also affect consumers.
A recession can occur many times after a stock market crash. This post explores more about recessions in history.
Bear Markets in History
There have been some historic bear markets over the years. There are many more bear markets that I could mention, but I wanted to share the ones I found.
According to an analysis by First Trust Advisors, since 1926 there have been eight bear market periods, with a range of durations from 6 months to over 2.8 years. The severity also varied, from a drop of 83.4% in the S&P500 to a fall of 21.8%.
Stock Market Crash of 1930 was the main event of a 2.8-year long bear market, which wiped 83.4% of the S&P 500’s value.
The bear market from 2007-2009 lasted for 1.3 years, and the S&P500 fell by 50.9%. (Investopedia)
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What is a bear market?
You will experience a lot of volatility and stock price drops during a bearish market. Your assets will likely drop in value or fluctuate.
Bear markets are only bad for you if your plan is to sell your assets, or if your money is needed in any way. If the markets are too overvalued, a bear market may be beneficial to bring things back into balance. A falling stock price can also be beneficial for the long-term investor.
If you’re dollar-cost-averaging your investments, a bearish market can give you more chances to buy stocks. Avoid panic selling if you have the funds in your investment and don’t need them.
How to Survive a Bear Market
A bear market on Wall Street can make you feel a whirlwind of emotions. These emotions can cause panic and lead to bad decisions.
This is why so many people fail in the stock exchange. They let their emotions take over and think in a fog.
Here are some things to consider when you invest your money in a bear market.
- Always diversify your investments:
Diversification will not protect you from losing money if a recession occurs. Even in a bear market you can lose money.
Diversifying your investments will help you to protect your portfolio from catastrophic losses, and also keep it more balanced.
You can invest in stocks, bonds, REITs or even gold and silver. Keep your portfolio well mixed and find the right balance for you.
- Continue to invest as if nothing has happened:
Dollar Cost Averaging is a great way to invest over the long term.
Do not make any changes to your investment strategy.
You will be able to reduce your risk and make sure that you are balancing out your future investments. I have bought funds at times when the market was downtrending, and also when it is at its highest.
It doesn’t matter, I will invest for at least 25 years.
- Keep a little extra cash on hand:
Although dollar-cost-averaging is an excellent strategy, I would also recommend keeping some extra cash in the bank.
Save money to cover emergencies and (if possible) keep some aside for when the stock markets fall.
You’ll be 99% unsuccessful if you try to predict the bottom of the stock market.
When things go downhill for a while, you might want to buy more or extra of a certain fund at a lower price.
- Ignore media that predicts doom:
It’s okay to read financial publications occasionally, but avoid them during bear markets.
Stock up on canned food and prepare to bunker down. You get the idea.
It can make you panic and sell your investments or take rash decisions.
Limit your reading or read articles with a grain-of-salt so that you don’t base investment decisions on them.
- Log in to your investment account less:
It is a good idea to not log into your accounts too often. To survive a bearish market, you must resist the urge to log in daily or even multiple times per day.
You shouldn’t need to log in as often if you have diversified your investments and are consistently investing.
If you log in too often, you may be tempted to make rash decisions, such as selling, buying, or adjusting your settings.
Remove the apps on your phone to protect your mental health. Avoid the temptation of logging in via your computer.
You can check in every now and then, but more than once a week could drive you crazy.
- You can earn additional income by:
A bear market is unlikely to lead to a recession but it could happen. These can be scary because they affect jobs and money.
Although I haven’t experienced a recession in my lifetime, I am sure that I will.
Another way to help is by having a second source of income. (No, it’s not your dividends and capital gains from stock market investments.
Many of these side hustles can be used to help you achieve a variety of goals.
You can save money more quickly
You can fall back on other income if you lose your job due to a recession.
A bear market can also affect other sources of income. It’s a good idea to diversify your income streams if possible. There are many side hustles to earn money online.
Final Thoughts
Bear markets are scary and intimidating for both your investments and economy. They are a normal part of life.
If you see these things, remember that the world will not end. Money is not the most important thing to be concerned about if it’s ending.
A bear market can be a very challenging time. (Think of the 1929 crash.) But it will recover over time.
The above checklist should help you to be better prepared for a bearish market.
You want to be ready for the worst in order to protect your finances and personal life.
