How to maximize your earnings despite market volatility.
As stock prices continue to sink, many investors are concerned about what that means for their portfolios.
The S&P 500 and the Nasdaq are officially in bear market territory after falling more than 20% from their peaks earlier this year, and nobody knows how long it will take for the market to recover.
Is it still worth it, then, to continue investing right now? And is it possible to make money even when we're in a bear market? It depends on your strategy.
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How not to invest during a bear market
During periods of volatility, it can be tempting to try to time the market -- or buy only when prices are at their lowest and sell when they reach their peaks.
In theory, this strategy makes sense. By investing when the market is at rock bottom, you can take advantage of those lower prices. Then when stock prices rebound, you can sell your investments for a hefty profit.
However, timing the market successfully is incredibly difficult, and it relies more on luck than skill in most cases. The stock market is unpredictable, and even the experts don't know exactly when prices will bottom out or how high they will get. If you buy or sell at the wrong moment, it could be costly.
Also, short-term investing outlooks can be riskier. Stocks that have the potential for short-term gains aren't always the healthiest investments overall, and there's a chance they may not recover from a market downturn. If you put a lot of money into short-term investments in the hopes of making a quick buck, you could lose more than you gain if those stocks fail.
A safer way to make money during periods of volatility
The good news is that it is possible to make money during a bear market, and it's easier than you might think. The key is to invest in strong companies and hold those stocks for the long term --regardless of what the market is doing.
Strong stocks from healthy companies are far more likely to recover from periods of volatility.That means no matter how far stock prices fall, you can rest easier knowing your investments have a good chance of bouncing back when the market inevitably recovers.
By holding your stocks for the long term, it also won't matter how many ups and downs the market experiences on its road to recovery. You don't need to predict how stock prices will fluctuate like you would if you were timing the market, because all that matters is that your investments see positive returns over time.
Historically, the market has seen positive long-term returns. In fact, in the last two decades alone, the S&P 500 is up more than 150%. That's despite several major downturns, including the dot-com meltdown, the Great Recession, the COVID-19 crash in 2020, and the current slump.
^SPX data by YCharts
While nobody knows exactly how the market will perform in the coming weeks or months, we do know that over the long run, it will experience positive average returns.
There are never any guarantees when it comes to the stock market. But by investing in quality stocks and holding your investments for the long term, it's far more likely you'll generate wealth despite all of the ups and downs along the way.
FAQs
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 does Warren Buffett say about bear market? ›
Be fearful when others are greedy, and be greedy only when others are fearful. In other words, bear markets are often the best time to buy.
How do you take profit in a bear market? ›
Buy-and-hold investors can often take advantage of lower prices during a bear market to add valuable stocks to their portfolios. Day traders and other short-term investors, though, may need to use strategies such as short selling, put options, and inverse ETFs to make a profit during a bear market.
What is a good investment for the 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.
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 do bear markets make you rich? ›
In a bear market, stock investors can get rich by taking advantage of falling stock prices and buying shares at a lower price. They can also invest in defensive stocks that perform well during economic downturns, such as health care and consumer goods.
Why not to sell in a bear market? ›
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.
Should you stay invested in a bear market? ›
“Investors who remain even keeled and disciplined in a negative market are likely to avoid common pitfalls and potentially enjoy better times ahead. Historically, the longer you stay invested, the greater your possibility of meeting your long-term goals.” Check in with a financial advisor.
Why do investors sell during a bear market? ›
When they see a shrinking economy, investors expect corporate profits to decline in the near future. So they sell stocks, pushing the market lower. A bear market can signal more unemployment and tougher economic times ahead.
Where do you put cash in a bear market? ›
Some markets, such as bonds, defensive shares and certain commodities like gold often perform well in bearish downturns.
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.
How do I survive a bear market? ›
- Keep Your Fears in Check.
- Use Dollar Cost Averaging.
- Play Dead.
- Diversify.
- Invest Only What You Can Afford.
- Look for Good Values.
- Take Stock in Defensive Industries.
- Go Short.
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.
Where are big investors putting their money? ›
Prior to the big rise in interest rates in 2022, investors gravitated toward short-term and high-yield bond funds. Now, with interest rates higher across the board, investors are choosing safer government and long-term bond funds and taking advantage of high interest rates on money market funds.
Will 2024 be a bull or bear market? ›
The S&P 500 soared throughout the year and finally reached a new high in January 2024, making the new bull market official. The onset of a new bull market has historically been a very reliable stock market indicator.
How long will the bear market 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.
Should I sell my stocks in a bear market? ›
It's common knowledge that the main goal of investing is to buy low and sell high, but by reacting emotionally to market swings, you're literally doing the opposite. Invest in stocks that you want to own for the long run, and don't sell them simply because their prices went down in a bear market.
Are we still in a bear market in 2024? ›
With stock indexes at all-time highs, it seems we are in the midst of a new bull market. While much of the market's recent gains have come from a handful of stocks, the rally has begun to broaden in recent months. Expectations of an earnings rebound in 2024 suggest earnings could continue to drive the market higher.
