In contrast to a bull market, entering a bear market refers to a drop in prices over a certain period. Now, since the term isn’t exactly precise, the numbers that indicate a bear market are, and probably always will be, debated over. Most will, however, agree that a drop of at least 20% over a period of two months constitutes entering into bear territory.
Many investors dread such times, as they can lead to significant financial losses if not properly handled. The period is also very stressful because you never know how deep the market will drop. Neither will you know when it’ll prop itself up again. There’s no need to worry, though. We’ve prepared a few essential tips that can help you survive, or even strive off a bear market.
One of the most common mistakes traders make during uncertain bear periods is getting frightened and overselling. While selling might appear to be the soundest thing to do during a drop, it’s only so on the surface level. Trading everything away might prevent some short-term losses. However, it can also severely damage you when the prices recover, leaving you without assets that might’ve yielded large profits.
What you should do instead is analyze the quality of your assets and leverage the opportunity cost. While bear markets can cripple all instruments, they’re especially mean to sub-par ones. Dump those and keep your high-quality stocks, as they might be your lifeline once prices return to normal.
On the other side of the spectrum, differing from the previous piece of advice, there is another that is just as important. Buying when prices are low is the logical thing to do. Even people who’ve never touched investing could tell you that much. That then leads us to the conclusion that bear markets are the perfect time to purchase assets.
That’s all sound, but some people take that advice a bit too literally. They end up using emergency funds to buy assets in hopes of achieving large gains afterward. However, those profits can take quite some time to surface. Remember that you don’t have any real indication of when the market will bounce back.
Don’t trap yourself into a situation where you don’t have enough money for necessities because you’re waiting for the market to recover. Keep your wits about you when buying and don’t spend any funds you can’t afford to waste.
Keep Your Portfolio Diverse
While it can be tempting to invest everything into a high-quality stock, it can also be a recipe for disaster. If that stock takes a large hit once a bear market occurs, you can get stranded without a penny in your pocket.
Diversifying your portfolio is one way to combat bear markets, as it avoids the issue of going all-in. If your instruments are split between stocks, bonds, alternatives, and cash, for example, chances are at least some of them will take a smaller hit than others and can serve as a rainy day fund.
Get Secure Stocks
While no stock is immune to fluctuation, there certainly are some that tend to perform better in difficult times. Ensuring that you have some of those in your collection can prove to be a significant factor in surviving those times when prices are dropping.
Secure, non-cyclical, or defensive assets can provide a stable source of income in an otherwise chaotic time. Examples of those can be stocks in companies that produce household items that are constantly spent on and replaced. Hygiene items, such as shampoo or toilet paper, fall under that category.
While navigating bear markets can be emotionally and financially straining, there are things you can do to make it easier on yourself. The two basic things everything else boils down to are preparation and patience. If you prepare correctly by diversifying and getting some backup stocks beforehand and stay calm with trading while in bear territory, you’ll come out unscathed, or even better off compared to competitors.