Want to know how to invest in a bear market? Well, you came to the right place because we will go over 6 bear market investing strategies that are highly effective.
Bull markets don’t last forever and while you can’t time the next market crash, it’s best to be prepared and have strategies you can use when the next bear market comes around.
In fact, bear markets are wonderful opportunities for medium and long-term investors. The more overvalued a market becomes during a bull market, the greater the market’s long-term downside risk.
Let’s dig deeper….
How To Invest In A Bear Market
As you know, bear markets cut valuations significantly.
This means that the market becomes much cheaper and a much better long-term buy after a bear market bottoms.
This also means that the market’s long-term downside risk is smaller because the market is already undervalued.
So how should medium-to-long term investors invest in a bear market?
If you want to know how to invest in a bear market then here are some common bear market investing strategies that you should consider.
- Dollar-cost average into Index Funds
- Shift into defensive sectors
- Shift to long term Treasury bonds
- Buy inverse ETFs.
- Shift to 100% cash
- Shift to short term Treasury bonds
Let’s look at each of these investment strategies in detail.
Dollar-Cost Average Into Index Funds
As we mentioned earlier, bear markets provide opportunities to purchase stocks at a discounted price.
So, you should just buy whatever stocks you like right? Well, no…
During bear markets, companies are hurting and you don’t know how long the bear market can last and you don’t know which companies will survive.
So, if you are a long-term investor that is planning to invest for 10 years or more then one of the best bear market investing strategies is to dollar cost average your investments into index funds.
If you don’t know, dollar-cost averaging is simply spreading out your investments over time to lower your risk.
Also, by investing in index funds which are just a basket of stocks you are lowering your risk also.
Every generation will see at least 2 bear markets in their lifetime
In the U.S, bear markets usually last 289 days, and the average decline is 35%.
However, you shouldn’t use the averages above to try to time the bear market because every bear market is different and you can’t time the market.
You just don’t know when a bear market will end!
So, by dollar-cost averaging into index funds, you are purchasing a basket of stocks for cheaper and cheaper as the bear market continues which lowers your cost meaning you will have a better and lower entry price for your investments.
The reason this strategy works so well is that the economy will most likely recover over some time and be better off and by purchasing an index fund that tracks the S&P 500 or another index you are basically investing in the entire (or the majority) of the market.
This means that as the economy picks back up so do your investments which makes you more money!
A great way to use this strategy most simply is to use Wealthfront.
Wealthfront is an investment platform that uses complex algorithms to get you the best returns on your money by investing in safe index funds.
You can set up dollar-cost averaging and Wealthfront will do all the investing for you.
Plus, when you sign up to Wealthfront with my link you will get $5,000 managed for free without any fees!
I highly recommend using this bear market investing strategy and utilizing Wealthfront to do so.
Shift Into Defensive Sectors
The second bear market investment strategy is to shift into defensive sectors.
There are investors who move from high growth and innovative sectors like technology into defensive sectors such as utilities when there is a bear market.
Defensive sectors are seen as more stable investments and they tend to move less than the S&P 500.
This means that if the broad index goes up 1%, defensive sectors might only go up 0.5%. If the broad index goes down 1%, defensive sectors might only go down 0.5%.
Even though you will lose money no matter what in a bear market, investors who shift into defensive sectors won’t lose as much money as the average investor in a bear market.
Defensive sectors are less volatile which means they fall less than the broad index in a bear market which means they are a safer option.
Now, when I say defensive stocks I don’t mean defense stocks like companies that make weapons and the such.
Defensive stocks are companies that make everyday products that people will continue to purchase even when there is a downturn in the economy.
For example, some of these products include toothpaste, soap, food seasoning, etc…
Think of companies like Johnson & Johnson, Proctor & Gamble, Coca-Cola, etc…
So, even though these companies will take a hit during a bear market, it will be less of an impact than other sectors and these large companies will most likely recover.
If you are interested in using this bear market investment strategy then I recommend investing in the Vanguard Consumer Staples ETF (VDC) which is a fund that holds many different defensive stocks.
You can invest in VDC with Webull for free.
Plus, when you sign up to Webull with my link you will get 2 free stocks for just signing up!
I highly recommend checking out Webull and adding defensive stocks to your portfolio to mitigate risk.
Shift To Long Term Treasury Bonds
Some investors like to shift into long-term treasury bonds when a bear market affects the stock market.
Investors do this for two good reasons:
- They earn some interest from the bond while they’re holding the bond.
- Interest rates usually go down a little during equities bear markets. This means that the investor is earning capital gains when he/she sells the bond at the bottom of the equities bear market.
This strategy works most of the time, but not always.
Sometimes interest rates rise during an equities bear market and economic recession.
For example, the 10 year Treasury yield went up during the 1969-1970 and 1973-1974 bear markets, so bond market investors would have lost money.
The 10-year yield went down during the 2000-2002 and 2007-2009 bear markets, so bond market investors would have made money.
Buy Inverse ETFs
The third bear market investing strategy is to buy inverse ETFs.
Some investors buy inverse ETFs during bear markets, hoping to profit from the market’s decline.
This can be a good idea, but you will need to be extremely accurate in catching the bull market’s top and the bear market’s bottom which is unlikely.
Now, some investors try to rake in money by utilizing leveraged inverse ETFs but this is not a good idea at all!
Inverse ETFs are not meant to be held as long-term positions during bear markets because leveraged ETFs have erosion problems.
ETF erosion is usually a bigger problem during bear markets than bull markets.
This means that erosion can have a detrimental impact on leveraged inverse ETFs during bear markets.
If you want to know how to invest in a bear market then inverse ETFs are a good idea but just be careful with this one!
Shift To 100% Cash Or CD’s
A good bear market investing strategy is to shift to 100% cash. You don’t always have to hold a position.
I know it’s not technically an investing strategy but hear me out…
Sitting on 100% cash and making $0 in profit is much better than being everyone else around you who is losing money during a bear market.
Becoming richer/poorer is a relative term. If other investors’ portfolios are down -30% and you’re flat, you are beating the average and index!
This bear market strategy is simple. Shift to 100% cash when you expect a bear market to start.
Shift back to 100% long only when you think that the bear market is over and that a new bull market is about to begin.
I know timing the market is not possible but whenever you feel like you want to take some risk off the table you can start selling off your stocks and then saving more.
Now… you don’t need to put all your money into a savings account that gives you no money in interest or stuff it under the mattress.
I recommend checking out CIT Bank and use their high-yield savings account and CDs to earn something which is better than nothing!
However, with CD’s you will need to lock your money away for a set period so just keep this in mind.
Shift To Short Term Treasury Bonds
If you really want to know how to invest in a bear market then one of the best bear market investment strategies is to invest in short-term treasury bonds.
The way it can work is like this…
You can either use the cash you have or sell all your stocks when you think an equities bear market is imminent and then shift to 100% into short-duration Treasury bonds, such as the 2 year Treasury bond.
You will then earn money from the interest on those bonds.
Once the bond matures, you can use the proceeds and wait for a good entry point to buy back into stocks.
The only risk with this strategy is the very small possibility of a U.S. government default.
Of course, you won’t get rich off of treasury bonds but it will give you some return on your investments while stocks falling with no end in sight.
Now you know how to invest in a bear market with these 6 bear market investing strategies!
A bear market incites fear in all investors with good reason but if you use these strategies then you can mitigate your investment losses.
Have you ever used these bear market investing strategies before? How do you invest in a bear market? Let me know in the comments below!