How to Invest in a Bear Market?
You can make money in a bear market and you can lose money in a bear market.
How to Lose Money in a Bear Market
Investing is as much a psychological exercise as a financial exercise. By the time a bear market arrives, a bull market has typically been in place for some time. Investors get used to stocks going up all the time.
When stocks turn down, they tell themselves it’s temporary. As the drop continues the fear grows. At some point – analysts call it capitulation – they panic and sell everything, often at a large loss.
Then stocks turn up, and the bruised investors wait, hesitant to jump in after taking a beating. By the time they muster the courage to buy again, stocks are well on their way to another peak.
That is called selling low and buying high, and it is a great way to lose money.
How to Make Money in a Bear Market
There are many ways to successfully navigate a bear market. Different strategies are appropriate for different investors.
If you’re a relatively young investor and you’re confident in the strength of the stocks in your portfolio, it makes sense to just wait it out. Your portfolio will go down and it will go up again.
If you’re older and approaching retirement, you’ll need to take steps to protect the wealth you’ve earned.
This process starts during a bull market. As a bull market approaches maturity, you’ll see those around you taking on more risk. That’s a good time to be cautious. You’ll want to clear margin debt and avoid taking more on. It makes sense to protect more speculative positions with stop-loss orders and move money into defensive investments.
If you’ve missed the boat on that, it’s not the end of the world. Remember that the bear market will end and stocks will rise again. You might want to delay tapping your portfolio, but you certainly don’t want to sell deep in a bear market.
For active traders, there are ways to make money as stocks drop. All of these carry risks.
- Short selling involves borrowing shares and buying cheaper shares – if they fall – to pay back what you borrowed. This is a high-risk strategy and can incur large losses.
- Put options buy you the right – but not the obligation – to buy a stock at a specific price at a specific time. You can still lose, but it’s less risky than short selling.
- Inverse ETFs increase in value as an index decreases in value. If your timing is good and you buy early in a bear market, they can be profitable.
For most investors, the best way to make money in a bear market is to buy quality companies at a good price. You’ll need cash, of course, and you’ll also need a sense of timing. You’ll never call the bottom exactly, but if markets have already seen major losses and everyone around you is selling in panic, it’s probably a good time to buy!
Be fearful when others are greedy. Be greedy when others are fearful.
Warren Buffett
