How to Invest in a Bear Market
There’s no denying that the markets have become more turbulent. In fact, the major market indexes in the United States entered a bear market on Christmas Eve of 2018. In a bear market, prices for stocks and other securities fall, which can lead investors to panic and sell off their securities. As more and more people sell, securities prices continue to fall. In general, a bear market will eventually come to an end, hopefully leading to a bull market that brings the markets back up to their former glory, but in the meantime, your portfolios, mutual funds, IRAs, 401ks, and other securities-based accounts may lose value. Determining how to invest in a bear market can help protect your investments from the long-term effects of stormy markets.
What are securities? They are financial assets that you can trade in the financial markets. Stocks and bonds are the two most commonly known securities but there are many others, including futures, options, banknotes, and more.
So what’s the best way to stay afloat during a bear market?
There is no way to know how long a bear market will last. To help reduce the effects of the bear market on your investments, you will need to have a long-term plan.
To develop your plan, your first step should be to get in touch with your financial advisor. It is very easy to lose your cool during a bear market and start making fear-based decisions. People have lost a lot of money, for no reason, by pulling out of the markets when things got rough. So meet with your advisor to review your investments, make sure they are set at the right risk level, make any other suggested adjustments, and assure yourself that every step is being taken to protect your assets.
What’s the best way to protect my assets when values are falling?
One tool used by investors in a down (bear) market is “dollar cost averaging.” This technique is a long-term investment strategy in which you invest in small shares over time. Using this technique, you can set yourself up for greater earnings when the markets recover.
How does it work?
If you have an IRA or a 401k, you are probably already engaging in dollar cost averaging. The way it works is that you make scheduled investments every month (as when you deposit money into your 401k with each paycheck). Some of these investments may lose value because the share price was high, when the investment was made, and will lose value over time. But some of them will gain in value because the share price was low, at the time of purchase, and will rise in value over time.
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As the word “average” suggests, the idea is that over time, the average of your gains and losses will provide a more positive result than you would have experienced had you made less frequent, lump-sum investments.
Some people try to “time the market” which means they try to determine when the market is turning around. They sell their shares when they think the market is at its highest and buy when they think it’s reached its lowest. Unfortunately, this often results in big losses and missed opportunities, because there is no crystal ball for the financial markets, particularly during a volatile time.
The good news is that bear markets do come to an end, and when they do, those who have held tight will have a solid foundation for enjoying the rebound, when the value of securities begins to rise again.
And in conclusion…
The bear market that hit in late 2018 has been referred to as a “baby bear market,” meaning that the markets nose-dived, making it appear as though we were headed into a recession, but quickly bounced back to new highs. In January, the S&P 500 rose over 8%, rewarding those who practiced dollar cost averaging with greater returns. This was an example of how well the technique works. Prepare for the next bear market by using this opportunity to meet with your financial advisor.
It should be noted, however, that dollar cost averaging does not assure a profit and does not protect against loss in declining markets. Since dollar cost averaging involves continued investing, regardless of fluctuating securities prices, you should consider whether you will be able to continue purchases over an extended period.
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