Investing during a bear market can feel intimidating, especially when prices drop quickly and uncertainty dominates the headlines. Yet downturns also create opportunities for long-term investors who know how to navigate volatility with discipline and strategy. By focusing on fundamentals, pacing your investments, and protecting yourself from unnecessary losses, you can position your portfolio for future growth even in challenging conditions. With the right approach, a bear market doesn’t have to derail your financial progress.
Look For Bargain Stock Prices
Warren Buffett, the most successful investor of all time, famously advises that you “be greedy when others are fearful.” That means you should see market downturns as an opportunity to buy stocks at discounted prices. Depressed prices present bargains for opportunistic investors. In any bear market, you should look to go hunting. Stocks are on sale!
In the current downturn, many industries and sectors have seen their stock prices hammered. Some of them have been reduced to their lowest prices in more than a decade. This includes airline, restaurant, and bank stocks. The underlying fundamentals of many of these companies are perfectly fine, though. Their share price is only depressed because of the economic impact of a global quarantine.
Once economies around the world reopen, these stock prices are sure to rise again. That means that right now is a good time to buy low, in anticipation of selling high at a later date. Rather than fret that your portfolio has taken a hit in recent months, focus instead on bargain prices and future growth potential.
Invest Gradually, But Steadily
When stock markets are on a rollercoaster ride from extreme highs to extreme lows, you’ll want to be careful. It’s important to exercise some degree of caution when putting your money to work. While you should search for bargain stock prices, don’t storm into the market and invest your money all at once. It could be a disaster. Instead, you should invest gradually but steadily. You should buy some shares in a company, but hold some of your money back. Just wait a bit to see what happens. If the price falls further, consider buying some more.
Similarly, if you feel the stock market has further to fall before hitting bottom, hold onto some cash. Just be patient. Wait to see where the market moves. Try to avoid rushing back into the market on days when the indexes are on an upswing.
Remember, the aim is to try and get the best price possible when you buy. This will require a degree of patience on your part. A slow and steady pace of investing your money is the best strategy during a bear market. This approach will also help your dollar cost average, which is the average price you paid for a given stock over time.
Diversify Your Investments
You should diversify your assets even at the best of times. However, it’s even more important to do it during a bear market. Yes, you should hold some fixed income, such as bonds. But you should also be diversified among the stocks you hold. Don’t put all your money into one company or sector, such as Apple or only technology stocks. Make sure you have a good mix of stocks across a broad range of economic sectors. Invest in banks, biopharmaceutical companies, technology, and grocery store chains, for example.
Another great way to diversify is to invest in an Exchange Traded Fund (ETF) that tracks a particular stock index, such as the S&P 500. This will give you access to hundreds of different companies that are traded on the exchange. Some commodities (like gold) are known as “safe haven” investments during a market downturn or correction. The key is not to put all your eggs into one basket.
If you’re diversified properly, then some of your investments are likely to increase in value, while others fall. For example, your technology stocks might be rising, as your bank stocks stagnate or fall. The more diversified you are the less likely you will be to see your portfolio plunge into the red during a bear market.
Use Stop Loss Orders
One of the best ways to protect your investments during a bear market is to use stop loss orders. These guarantee that you will sell your particular holdings if they fall to a certain level. Not only can stop loss orders prevent you from losing money, but they can also be used to lock in profits.
For example, say you bought shares when they were at $255 each. The price runs up to $275 per share. You place a stop loss order at $270 a share. This means that if the share price falls to $270, you will automatically sell. You’ve locked in a profit of $15 per share. You’ve also made sure to sell before you hit a negative return.
Using stop loss orders is critically important during times of market ups and downs. Stop loss orders also provide you with some peace of mind, knowing that you don’t have to constantly be monitoring your investments. If the price of a stock you’re invested in falls to a certain price, you will simply sell, liquidating your position. When done properly, you’ll either realize gains or prevent steep losses. It’s an invaluable tool during a bear market.
Stay Current and Be Watchful
While you shouldn’t have to watch your stock portfolio around the clock, it’s still advisable that do-it-yourself investors pay attention to what is happening in the markets. Make sure you are watchful during a bear market or other times of extreme volatility. You’ll want to know, for example, when oil prices collapse further. This can send the whole market downward.
On the other hand, when some U.S. states announce that they are gradually reopening their economies, it might give stocks a boost. When bad news erupts overseas in places like Russia or China, it can send investors running for the exits. Paying close attention and being aware of what is happening during a market downturn will provide you with the information you need to make smart moves with your investments.
Knowledge is power. It’s true during good times, but downright essential during bad times. Be sure to set alerts on your computer or smartphone. Check the markets at least a couple of times a day. Make sure you know what is happening so that you can react appropriately.
The Last Word
It’s an unsettling time for investors all over the world right now. However, this market recession will come and go, like all others that came before it. Bear markets can be stressful. They are known to cause fear and paralysis among both professional and retail investors alike.
However, by using common sense and a few tools at your disposal — and keeping you head about you — it’s possible to defend your investment portfolio. You can even grow it during a market downturn, if you’re savvy enough. When in doubt, just hold onto your cash. Wait for good opportunities. A little patience and a firm view of your long-term goals can be a big help in times of drama and uncertainty.
