Bear Market Investing: How You Should Do It
Depending on your risk tolerance, a bear market may be the perfect time to start investing for the long term. Bear markets offer investors lower valuations, historically higher returns, and the ability to buy more shares.
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Investing is one of the most important things you can do to build wealth. When you invest, you’re putting money you already have to work allowing you to (hopefully) earn more.
Through investing, you can grow your capital and enjoy the magic of compound interest.
If you are new to investing, you may wonder when you should start, or how to time your entry into the market. It is often advised to start investing during a bear market, although this might seem counterintuitive.
What Is a Bear Market?
In contrast to a bull market with high stock valuations, a bear market is when stock prices are falling, and investor confidence is low. Specifically, it’s defined as a 20 percent loss or more in stock prices over at least a period of two months. It’s a time when investors generally lose money.
However, with lower stock prices, it’s also great time to buy because the stock market is cyclical and so those lower prices are likely to eventually rebound to higher prices.
While bear markets can provide opportunities, many people sell during these times rather than riding it out because they fear more losses. In most cases, for long-term investors in established stocks, it’s better to wait for the market to go back up, rather than selling at the bottom.
Investing During a Bear Market
Bear markets are often viewed as a great opportunity for younger investors. Younger investors have a longer timeline to make up any losses they may experience during a bear market. People who start investing in equities during bear markets are much better off 30 years later than investors who start in bull markets.
There are some cautions to consider if you’re thinking about investing in a bear market. First, consider your investment timeline. If you’re nearing retirement, a riskier strategy of investing when stocks are falling may not be best for your financial goals. You also need to ensure that you are prepared weather more losses during a bear market before you see gains.
Most investors trying to take advantage of a bear market should employ a set-it-and-forget-it strategy, so they’re not constantly on edge about every dip in the market.
Risk tolerance is how much variability, or ups and downs, an investor can handle. If your portfolio carries too much risk, it can lead to panic or losses. At the same time, but if you’re not risky enough in your investment strategy, you may miss opportunities and more significant returns down the line.
When investing in a bear market, consider the following regarding risk tolerance:
Conservative or Risk-Averse
When someone is risk-averse, such as during retirement when you rely on your investments to sustain your life, most advisors would caution against jumping into a bear market. Most risk-averse investors already have a diversified portfolio, and tracking major markets can be a good option here. Bonds can be a good option during a bear market as well. Bonds tend to be more stable even when the market is volatile and so they are often a preferred investment for retirees and risk-averse investors.
For someone who’s moderately risk-averse, which may be someone who’s in the middle-aged earning years, holding their stocks – not buying or selling – during a bear market is often optimal. If you’re moderately risk-averse, while you may not have as much time as someone in their 20s to make up losses, you’ll likely see your portfolio rebound into gains.
If you are risk-tolerant and can withstand volatility over time, a bear market is an excellent time to make new purchases and start investing for the first time. You may find the opportunity to buy a meaningful amount of shares in large companies that you normally wouldn’t be able to afford.
A bear market can present excellent opportunities. It is important to assess your own tolerance or aversion to risk, and, especially if you are younger, a bear market may be your best time to jump into investing.
Author: Ashley Sutphin