Great Strategies For Investing During A Bear Market

The current investing environment is scary for retail investors, as the markets in the early 2020 have been more volatile than at any time since the Great Depression of the 1930s. The steep drop in stock prices since the end of February ended the longest bull run in U.S. history. It also moved investors into a bear market, which is defined as a drop of 20% or greater in benchmark indexes. The indices have bounced back violently, but some forecasters say that the worst may still be ahead.

So, how should you invest in a volatile bear market? Pay careful attention because there are steps you can take, whether it’s the 2020 crash or the next major market hit that comes along. Here are five strategies to protect your investments and ensure your money continues to work for you during times of depressed prices and uncertainty.

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!

Many industries and sectors have seen their stock prices hammered in the current downturn. Some, like airlines, restaurants, and bank stocks, have been reduced to their cheapest prices in more than a decade. 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 surely 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

You’ll want to be careful when stock markets are on a rollercoaster ride from extreme highs to extreme lows, exercising 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 because it could result in a disaster. Invest gradually but steadily instead. You should buy some shares in a company, but hold some of your money back to continually invest into it. If the price falls further, consider buying some more.

Similarly, hold onto some cash if you feel the stock market has further to fall before hitting bottom. Just be patient and 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, but it’s worth the effort. A slow and steady pace of investing your money, known as dollar cost averaging, is the best strategy during a bear market.

Diversify Your Investments

You should diversify your assets even at the best of times. However, it’s even more important to spread out your risks during a bear market. 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, bio-pharmaceutical 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. By buying into an ETF, you are essentially buying a basket of stocks. In essence, this one investment will give you exposure to hundreds of different companies that are traded on the exchange. You may also want to consider commodities (like gold), which are known as “safe haven” investments during a market downturn.
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, they can also be used to lock-in profits.

For example, say you bought shares in Microsoft when they were at $255 each and the price runs up to $275 per share. If you then place a stop loss order at $270 a share, it means that the investment platform will automatically sell your shares if the share price falls to $270. In this example, you’ve made sure to sell before you hit a negative return, and locking in some gains.

Using stop loss orders can save you from massive losses during times of market ups-and-downs. Stop loss orders also provide you some peace of mind, knowing that you don’t have to constantly monitor your investments. If the price of a stock you’re invested 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 aware of major developments around the world during a bear market or other times of extreme volatility. You’ll want to know, for example, when oil prices collapse further, as this can send the whole market downward.

Or if bad news erupts overseas in places like Russia or China, it can send investors running for the exits. On the flip side, when some U.S. states announced that they are gradually reopening their economies, it might give stocks a boost. 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 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, causing 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 your wealth during a market downturn if you’re savvy enough. When in doubt, just hold onto your cash and 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. And don’t underestimate the importance of diversifying your investments either. It may save you from complete financial ruin in a bear market.


Devon Taylor

Devon is a Canadian-based writer and a father of three young children. He's simultaneously trying to build college funds and plan for an eventual retirement. He's been in online publishing since 2013 and has a degree from the University of Guelph.

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