4 Ways to Survive and Prosper in The Bear Market

Bear Market

The bear market is a fact of life. That does not make it easier to anticipate them, predicting how long a person will survive, or estimate the depth of the decline. But you don’t need to be Clairvoyant to take some wise steps to minimize your bear market losses while increasing long-term investment returns in bargaining.

What is the bear market?

The bear market is generally defined as a decline in the stock market by 20% or more as reflected in the extensive index such as Standard & Poor’s 500 or Nasdaq Composite.

Because the stock market can often experience a decrease in 5% or more, investors often do not realize that the bear market has occurred until their losses pass that point.

The combination of losses that have been suffered, increased uncertainty about the future, and increasing market volatility can make investors examined with doubt and cannot take corrective action while their portfolio is long-term damage.

While each bear market in history is finally followed by a higher price, many portfolios that are destroyed by the bear market have needed more time to recover, and some never did it. The first order of business in investing is preserving capital, and no one is like a bear market to bring home that point.

Meanwhile, profits made with high risk during the bear market do not count doubles. Everything is good and good to be greedy when other people are afraid if you are Warren Buffett. ;

What began appears like a 10% correction or a lightweight bear market can be proven to be a 78% dot-com bubble explosion from 2000 to 2002, or a decline of 54% in the average Dow Jones industry between 2007 and 2009.

So what can we do to really eliminate our losses, and even make money in the bear market? Here are four strategies that need to be considered.

Dollar-Cost Average

If you regularly invest a fixed sum in stocks, whether through a 401(k) or a Roth IRA, you will end up buying more as market prices go down and less as they go up, tilting the odds modestly in your favor.

The benefits of dollar-cost averaging accrue on top of those of making regular contributions to any tax-advantaged savings plan. For 401(k) plans, contributions and employer matches typically account for two-thirds of the annual balance increase while investment gains make up one-third. That suggests many 401(k) contributors have the means to rebuild their account balances from bear markets relatively quickly.

Many, of course, doesn’t mean all, and aggregates obscure significant differences based on the size of the 401(k) balance, among other factors. Those with balances of more than $200,000 experienced losses of more than 25% in 2008, while account balances under $10,000 grew 40% as contributions swamped investment losses, according to one study.

Calibrate Risk

No amount of dollar-cost averaging can get around the fact that workers with higher account balances have much more to lose in a bear market, while older plan participants have less time to make up any such losses before retirement. And of course there is a large overlap between these groups.

Considering the balance of risk and reward, an investor approaching retirement should have a much more conservative approach to a bear market than a younger worker with a smaller account balance. Yet often that isn’t the case. As of Q3 2021, Baby Boomers (those born between 1946 and 1964) were the generation most likely to be invested too aggressively, according to Fidelity Investments’ study of its retirement plan participants. In contrast, 51% of the GenX plan participants, 70% of the Millennials and 85% of GenZ were 100% invested in a target date fund.

Note too that target date funds also risk big losses in a bear market, losing between 23% and 39% in 2008 depending on the target date

Only you can determine what portfolio allocation will let you sleep soundly and safeguard your future considering your age, means, and risk tolerance. The important thing is to figure it out and act accordingly instead of surrendering to inertia.

Diversify Without Disengaging

Bear markets tend to savage growth stocks more so than value ones. By a happy coincidence, lower-risk stocks have generated long-term returns similar to those of riskier ones, despite the lower risk. For portfolios tilted towards speculative stocks, that means some diversification into value, even if it is overdue and takes place during a bear market, can pay dividends figuratively as well as literally long after the bear market is history.

Cash has a role in a diversified portfolio. Even if it doesn’t earn much yield, it represents a reserve of buying power that can be quickly marshalled as the bear market presents opportunities.

But if you place a significant proportion of your retirement account into cash during a bear market, you’ll face the unenviable task of having to figure out if, when, or where to redeploy it, or else face diminished long-term returns.

Market timing is hard, and trying it is likely to leave you poorer. Fidelity 401(k) plan participants who changed their equity allocation to zero between October 2008 and March 2009 and then invested in equities again after the downturn gained 25% through June 2011, versus 50% for those who left the allocation alone.

The 54% rebound in the S&P 500 between early 2009 and fall of 2011 left many plan retirement participants behind. One study focusing on workers ages 51 to 59 found the average account balance increased only 7% over the same span, with 45% of the workers experiencing a decline in retirement savings.

Hedge and Speculate Prudently With Options

Only a small percentage of options traders make money, while the vast majority of the retail investors hankering for the leveraged returns options can provide lose so much money that economists can only assume they’re doing it for gambling and entertainment.

If you’re not sure whether you belong to the small minority, you probably don’t. And if you did, you wouldn’t be here to learn that some option trades can make the smart or lucky speculator money in a bear market. You’d already know that put options or put spreads, especially those bought after a bear market rally, can be used to hedge long positions or acquired for a speculative trade.

At least if you buy a put, the acquisition cost is the value at risk. Selling a put, especially in a bear market, can prove much costlier. As prices decline, there is a good change the put will be exercised. And even if you end up acquiring a stock you wish to own at an acceptable price this way, chances are high that further bear-market declines will drive it lower.

The Bottom Line

Bear markets are no reason to panic but a good time to make sure your portfolio is properly diversified and de-risked. Know how much you have at stake and how much time you have to recoup any losses.

Share