- Date : 02/06/2022
- Read: 4 mins
Bear markets are unavoidable. However, it's difficult to predict them, how long they'll persist, or how much they'll affect stock prices. Because bear markets are an inevitable component of market cycles, here are a few investment strategies that'll ensure that you survive them, while also positioning yourself to profit from them.
A widespread, significant decline in the prices of assets by at least 20% from the recent highs tells you that you are in a bear market. These are not cheery times. However, deciding to combat the situation can be harmful sometimes.
This article will run through six fundamental investment strategies and attitudes that'll help you keep calm. Do not make hasty moves, even if there's a cut in your profits in bear markets.
1. Abandon Your Fears
"The Dow climbs a wall of worry," as the cliché goes on. In other words, despite economic troubles, terrorism, and a slew of other disasters, global Indices have continued to increase over time.
You should try to keep your emotions out of financial decisions as much as possible as an investor. What looks to be a massive global tragedy one day may be forgotten as little more than a blip on the radar screen a few years later. Remember that fear is an emotion that can distort your ability to make sensible decisions in a scenario. Maintain your composure and carry on!
2. Play Dead
The bears take control, and the bulls stand little to no chance in a bear market. Pretending to play dead is one of the best strategies in such a situation. It's pretty similar to what you would do if a bear in real life confronted you. Fighting back might be rather hazardous.
Investing a significant chunk of your portfolio in money market instruments could be the best investment strategy in finance. Certificates of deposit (CDs), bonds, treasury bills and other short-maturity products could be the instruments you're looking to invest in during a bear market.
Putting all your eggs in a single basket is always a wrong decision. You may avoid the negative consequences if you use the right asset allocation strategy.
The best way to diversify is by splitting your portfolio across stocks, cash, bonds, and other alternative assets.
Financial goals, time horizons, risk tolerance, and other critical factors must be considered in deciding how you want to diversify your portfolio. Every investor is in a unique scenario.
4. Invest only When You can Afford to Lose
Investing is crucial; however, it is not as important as saving up for survival. It's never a smart idea to put short-term funds in the stock market that are needed to satisfy daily demands. Bear market conditions, and even minor declines, can be exceedingly damaging at times.
You may also want to read: Is It Safe To Invest Your Hard-Earned Money In A New-Age Investment Avenue?
5. Look out for Opportunities While Investing
Stocks are battered, pummelling, and underpriced during a bear market. Bear market conditions are generally viewed as purchasing opportunities. This is because the valuations of powerful companies get pounded down, which makes them attractive for investment.
It would be best to increase your holdings in some of your favourite stocks during market declines because the bear market often harshly punishes the best companies.
6. Going Short Could be One of the Best Investment Strategies
One way to make profits is by short selling, that is, borrowing shares of a company or an Exchange Traded Fund and selling them at an appropriate point in time with the expectation of repurchasing them at a reduced price.
Put options are another investment opportunity. The value of these options increases when prices fall. It guarantees a minimum price to sell the underlying security. Thus, it puts forth a floor value for your expected losses.
Besides, you can make profits from a fall in significant indexes by investing in inverse exchange-traded funds (ETFs). The prices of these funds rise as and when the indexes fall. This lets you make profits despite the drop in markets.
The Bottom Line
The stock market eventually rises, and the economy expands in the long run. Bear markets may halt this generally optimistic pattern. However, these downturns have always ended and eventually reversed, reaching new highs. Investing during weak markets allows you to buy stocks at lower prices and build stronger positions.