How to Invest in Bear Market?

bear market, baisse, courses-4159033.jpg

The term “Bear market” had been monopolizing the news for the last few weeks. So, what is a bear market? A bear market is a market condition in which prices drop by 20% or more, or more than a market correction. Note in mind, that not all market corrections will result in a bear market. However, a bear market usually will follow a market correction.  There have been 22 market corrections but only four bear markets since 1974.

 

In a bear market, the fundamentals of good stocks generally remain the same, but their stock price falls drastically that leading to undervalued levels. The major question is why the price of even the best blue-chip stocks falls?

 

 

The “Bear” Bell?

 

There is no class bell alarming the market crash or when the bearish trend begins. The problem is that market correction doesn’t often lead to a bear market. However, a bear market correction is due to a market correction. Thus, it creates panic among investors whenever the market corrects itself. They fear losing the investment made and they also fear the impact the bear can damage. In addition, a bear market often occurs just before or after the economy moves into a recession, but not always.

 

Bear markets tend to occur when market prices have been rising for a time; investors are feeling buoyant. This exuberant feeling that a gambler. Speculators tend to drive prices higher and higher. 

How can we catch the bear signal ?

 

The early tiny bit signals come from the key economic indicator such as inflation, interest rate, employment and more. This is to judge the market conditions if the economy is currently slowing down. Once alerted to a declining economy, an investor foresees to see profit decline that leads to layoffs, and a major stock dump that leads to pushing the market lower. 

 

At the point of writing, 15/06/2022, Crypto Market had experienced the Bear Market for quite sometimes and the financial market seems to be following suit. Titan US-based crypto company, Coinbase (COIN:US) CEO, Brian Armstrong announced on the 14th of June that the company will be laying off 18% of its workforce claiming responsibility for the market downfall condition. The company will continue their global layoff plan, with another 8% of its staff in India as a start. Coinbase had also previously rescinded the new job offers it had sent out.  

 

 

 

The market downturns are unavoidable, and often relatively short, especially compared with the duration of bull markets, when the market is riding up in value. Bear markets tend to be shorter than bull markets with an aggregate of 363 days on average compared to 1,742 days for bull markets with average losses of 33% compared with bull market average gains of 159%, according to data compiled by Invesco.

 

 

 

What Investments Method Work in Bear Markets?

One method of investing during a bear market is to buy stocks at reduced prices. But you should be cautious with this approach. Stocks you buy in this market condition should be from entities that have weathered economic downturns before.

 

For this reason, many seasoned investors advise buying “toothpaste stocks.” These are not necessarily stocks from companies that make only toothpaste. These are stocks in companies that produce a large number of items people will always need, such as toothpaste or other living necessities.

During a bear market, almost every stock is at its worst. It is the perfect condition to apply “Buy the Dip”. In other words,  Bear markets provide good investment opportunities that allow an investor to buy stocks at reduced prices. However, beware in choosing this method as the stock can either fall even further or at worst, vanish from the market. 

The other approach is by focusing on the companies that make products that are necessary for daily usage. For example, buying stocks from a company that sells toothpaste or baby formula. This is because, no matter what happens to the market, people will always need to brush their teeth and baby need to drink their milk formula. Thus, buying company stocks that its core business is providing living necessities is another approach to counter the bear market and at the same time give security on the company’s longevity. 

Investor Mindset during Bear Market

The first thing that an investor should have during a bear market is to not overthink; as the behaviour often lead investor to panic and oversell. 

 

Become making any decision during a bear market, as yourself a few simple questions. 

First- Prices are falling, but does it means that the fundamentals of the company are also deteriorating? In most cases, the company had done nothing wrong, price crashed due to global crises, market corrections and recession. 

 

Second- How long does it take for the stock market to recover from a bear market? Historically, the market crashes took an extension of a year or two. If one can hold the asset during that period without affecting their daily necessities, then holding the stocks might be a good decision. 

 

 

Third: What is the time to invest in a bear market? This is an important question, just because the company’s stock price is low, that is not a green light indicator for an investor to blindly buy any stocks at discounted prices. Do extensive research. Practically it is not possible to catch the market bottom. However, after doing well analysis of the market, projection and the ability to climb the wall after the crash, even constructing a portfolio at a 50% discount might not be a bad option.

 

 

How to Invest in Bear Market?

Dollar-Cost Averaging. 

 

A strategy that is often being implemented by investors. It is to regularly add money to the market which means an investor continually invests money over time and in roughly equal amounts. This helps smooth out purchase price over time, ensuring you don’t pour all your money into the stock at its high. For example, the price of a stock in your portfolio slumps 25%, from $200 a share to $150 a share. You can buy the same amount of stocks at $150. This offset your average cost for the stocks at $175 a share. 

 

To implement this approach, it is important to shift the investment perspective from obsessing on the potential losses to potential gains. 

Portfolio Diversification. 

Having a mixture of different investment asset classes in one’s portfolio is always a valuable strategy. Hence it is during a bear market or bull. During a bear market, most companies that reside in a given stock index, such as the S&P 500, generally fall but not necessarily by similar amounts. A well-diversified portfolio is crucial, with a mixture of profit and loss stocks, it helps to minimize general portfolio losses. 

Bonds are an attractive investment medium during a shaky market condition due to their mechanism that often moves in the opposite direction of stock prices. Bonds are an essential component of any portfolio, but adding additional high-quality, short-term bonds to your portfolio may aid to ease the pain of a market crash. Furthermore, Even if stock prices aren’t giving any profit, getting paid in the form of dividends will be a great pleasure to investors. That’s why during the bear market, companies that pay higher-than-average dividends will be more attractive.



Conclusion

A bearish market may sound scary yet it is also a moment to make money. If an investment had been made before the crash, let it idle. Don’t make any panic selling. Let the market recover and only make the selling or holding decision. The bear market is like a test for all investors. 

 

While these hardship periods are difficult to endure, history shows it might not even be long for the market to recover. And if capital is invested for a long-term goal. Thus, the bear markets endure will be overshadowed by bull markets.



 

None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.

We hoped you’ve enjoyed this piece and appreciate the time you spent reading. We love making and sharing content which is insightful and actionable. Stay tuned for more exciting content, coverage and the latest news about the world of finance. Visit AxeHedge.com to learn more about what we do and how can we help you in your investment journey.

Written By

AxeHedge

Become a AXEHEDGE investor today.