Over the last 140 years, the stock markets have experienced many highs and lows. When the market is up we call that a "bull market." And when the market is down we call that a "bear market" especially when it's down through a prolonged period of time. During those negative cycles, more often than not, people want to “stop the bleeding” and “preserve their money”. But I would like to suggest some significant opportunities that exist when the market is down.
1. Save on Current Taxes
Most taxable portfolios will have a mix of investments – some will have gains and some will have losses. If you have an asset that has a gain, you may be able to offset the taxes owed on that gain by selling another asset with a loss. This process is called “tax-loss harvesting” and the objective is to sell a capital gain and not owe taxes.
2. Save on Future Taxes
If you have money tied up in a tax-deferred IRA, you may want to consider doing a Roth conversion while the market is down. Even though this does create a current tax liability, if you take the growth related assets in the IRA and convert them to a Roth IRA, the growth you experience over time would be Tax-Free when withdrawn instead of taxed as ordinary income.
3. Go Shopping
I don’t mean for you to go buy a new TV or car, however, you should maybe look to buy stocks with a history of paying dividends. Dividends are paid on a per share basis. Typically, you can purchase more shares at a higher dividend yield. If you look at companies with high free cash flow, dividend coverage ratio, and uninterrupted dividend history, then it is safe to think you will lock in a higher yield over the long term. Also, dividends are an excellent way to buffer the volatility of the markets.
4. Right-Size Your Risk
If you are in the middle of a market downturn and you find yourself deeply concerned or unable to sleep, this may be due to an over allocation to growth investments. Consider talking with a financial advisor to discuss the current risk profile of your portfolio. Doing this may keep you from making adverse knee-jerk reactions in the future. Click here to take our free risk assessment.
5. Nothing
Historically speaking, there have been 24 bear markets since 1928 as measured by the S&P 500. That is a period of time whereby the market has dropped at least 20%. The numbers represent an average drop of 30+% with an average duration of about a year. The average time it takes to “get your money back” after those periods was about 2 years (less than 1 year in half of the periods). If you sell out, you have to know when to buy back. These two actions are extremely difficult to time perfectly. In fact, if you look at the chart below (provided by Seeking Alpha & Blackrock) you will see that missing JUST the 10 best days of a bull market would cut your returns by almost 35% and if you missed the best 25 days you would experience an almost 75% reduction on returns. This shows that it is “Time IN” the market that more likely makes you money rather than “Timing” the market. That’s why “doing nothing” could help remove timing risk.
However you choose to look at things, there is always an opportunity to improve your current or future financial condition. If you need assistance with these ideas, find a financial advisor to walk you through implementing any of these strategies today.
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FAQs
How to invest during a bear market
- Make dollar-cost averaging your friend.
- Diversify your holdings.
- Invest in sectors that perform well in recessions.
- Focus on the long-term.
Long-term investors can find many valuable stocks at lower prices during a bear market, making bear markets a good time to buy if you can afford to wait to see your investments rebound. Traders looking to make a short-term profit may need to use other strategies during a bear market, such as short selling.
How do you get the most out of a bear market? ›
Going short in bearish times is one of the most common bear market strategies among traders. As a trader, you'll short-sell when you expect a market's price will fall. If you predict this correctly and the market you're trading on does decline in value, you'll make a profit.
How do people make money in a bear market? ›
Some markets, such as bonds, defensive stocks and certain commodities like gold often perform well in bearish downturns. If you have the risk appetite for it, bear markets may also be an opportunity to short-sell if trading, making a profit if you predict correctly when prices will fall (and make a loss if you don't)
What not to do in a bear market? ›
Selling off all your stocks after seeing red in your portfolio during a bear market is the last thing you want to do. Volatility is scary, especially if you are risk averse, but running with the volatility wave is key and beneficial to the success of your long-term portfolio.
Where to put money in a bear market? ›
Bonds — Bonds typically provide lower rates of returns than stocks on average but are usually less volatile and safer. Investing in bonds may help hedge your portfolio against the ups and downs of the stock market. Cash — This can include savings deposits, certificates of deposit and money market accounts.
What is good to buy in a bear market? ›
Government bonds and defensive stocks historically perform better during a bear market. However, most people investing for the long term shouldn't be aggressively tweaking portfolios every time there is a sell-off. The best way to go is to build a well-diversified portfolio and stick by it.
Why do people sell during a bear market? ›
Investors often sell in a bear market due to fear of further losses, but this can result in missing out on future recoveries. Selling crystallizes losses and prevents benefiting from the market's natural boom and bust cycles. A long-term investment approach typically yields better results.
How to survive a bear market? ›
Another option is to reduce your spending as much as you can during a bear market. This will allow you to withdraw less money from your portfolio when prices are down. Cutting spending isn't easy, but it may help you sleep better and get you through a period of high volatility.
How do you get out of a bear market? ›
Keep investing consistently.
By investing a fixed amount of money at regular intervals regardless of market conditions, you're more likely to be able to purchase equities at more affordable prices and potentially see the shares rise in value once the market rebounds.
Opportunity cost: In a bear market, investors who sell their positions to avoid further losses prevent gaining potential gains when the market recovers. This is known as opportunity cost and can result in lower returns over the long-term.
How long do most bear markets last? ›
The duration of bear markets can vary, but on average, they last approximately 289 days, equivalent to around nine and a half months. It's important to note that there's no way to predict the timing of a bear market with complete certainty, and history shows that the average bear market length can vary significantly.
How to take advantage of a bear market? ›
If you are a long-term investor (meaning a time horizon of 10+ years), one option is to take advantage of dollar-cost averaging (DCA). By purchasing shares regardless of price, you end up buying shares at a low price when the market is down.
Are millionaires made in bear markets? ›
And Millionaires Are Made in Bear Markets!
SO, as long as you stay focused on the long-term picture of continued growth and innovation – you'll be positioned to make a fortune.
How to make money if a stock goes down? ›
Short selling is a strategy for making money on stocks falling in price, also called “going short” or “shorting.” This is an advanced strategy only experienced investors and traders should try. An investor borrows a stock, sells it, and then buys the stock back to return it to the lender.
How do I survive a bear market? ›
Keep investing consistently.
By investing a fixed amount of money at regular intervals regardless of market conditions, you're more likely to be able to purchase equities at more affordable prices and potentially see the shares rise in value once the market rebounds.
How to make money when the market goes down? ›
Short selling is a strategy for making money on stocks falling in price, also called “going short” or “shorting.” This is an advanced strategy only experienced investors and traders should try. An investor borrows a stock, sells it, and then buys the stock back to return it to the lender.
How long does it take to recover from a bear market? ›
It's impossible to predict exactly how long a bear market will last, even for the best financial experts. All we can do is describe what has happened historically. Additionally, when the bear market is over, it may take several months or several years for the market to return to pre-bear market levels.
