Whether we like them or not, bear markets are inevitable. However, rather than fear them, we can exploit them.
- Bear markets are not a rare occurrence. They’re pretty normal. Since 1928, there have been 26 bear markets in the S&P 500 Index. In contrast, there have also been 27 bull markets.
- Bear markets generally don’t last long. The average length of a bear market is about 9.6 months. That’s considerably shorter than that of a bull market, which is 2.7 years.
- On average, stocks lose 36% during a bear market, while they gain 114% on average in a bull market.
Bearish markets are typically more dangerous to invest in, as prices become volatile and many equities lose value. However, there are various ways to take advantage of a bear market.
This article will explore the various ways that you can exploit bear markets.
What is a Bear Market?
A bear market occurs when there is a prolonged decline in the price in the market. This usually lasts for a few months and may occur in a single security or asset, a group of securities, or the securities market as a whole.
During a bear market, securities prices often slump 20% or more from recent highs to a new low.
It is difficult to say definitely how long a bear market will last. This is because different factors contribute to sustaining a bear market, including economic trends, interest rates, socio-political events, and the general sentiments of investors.
However, the average length of time that bear markets last is 289 days or almost 10 months.
Bear markets can be either cyclical or secular. Cyclical bear markets occur due to short-term reasons like when the moods of investors become negative. This can last for weeks or months.
Secular markets, on the other hand, are bear markets that are caused by long-term incidences like interest rates, geopolitical crises, or corporate earnings.
Unlike the cyclical bear market, secular markets can last for 10 to 20 years. There may be short-term interruptions where stocks or indexes rise for a while. But this does not last long, and prices go back to being low.
During cycle bear markets, there are short-term corrections that occur where prices drop by as much as 10%. But buyers usually appear to take advantage of the lower prices.
This is because they expect stocks to rise again soon. But once the sentiments and confidence of investors move again to skepticism, this affects the direction of the market again. Hence the cycle.
There have been 28 bear markets in the US since 1928. And there has been an average decline of 35.62% in the market.
During the Great Depression, stocks fell between Sept. 3, 1929, and June 1932. The market did not fully recover until the beginning of 1945. There were other dips in the stock market in 1973, 1973, 1980, 1987, 1990, 2000, 2007, 2008, and 2020.
The bear market in March 2020, was the shortest on record, as the market was able to recoup its losses in six months.
What are the Ways You Can Exploit a Bear Market?
Investors usually refer to bear markets negatively because historically, bear markets are often accompanied by an economic recession and unemployment.
However, there are authentic ways to thrive in a bear market. You can capitalize on a bear market and make terrific investments even when prices are depressed. Here are some ways to go about it:
#1. Buy Low, Sell High
During bear markets, prices are low. At such times, you can buy stocks at dirt-cheap prices. Afterward, when the economy picks up, you can then sell at higher prices.
To do this, you need cash on hand and a strong backbone to take advantage of market declines. You might not catch the exact bottom but after a 20% decline, you are probably buying at a stronger long term position.
#2. Use Dollar Cost Average Investing Technique
This means you spread your investment over a period of time and keep investing whether prices dip, or pick up. All you need to do is to regularly invest a sum of money over time in roughly equal amounts.
In doing so, you don’t get to wait till the “dust settles” before you invest. You also don’t take an extreme position of either sitting on all cash or investing all at once. You will get to take advantage of dips in the market while ensuring that you don’t put in all your money when stocks are high.
Eventually, you can balance out your purchases, and when the market recovers, record gains.
#3. Don’t Change 401k Contribution
A 401(k) plan is a retirement savings plan for employees. Named after a section of the U.S. Internal Revenue Code, signing up for a 401(k) means that you agree to have a certain percentage of your paycheck paid directly into an investment account.
Your employer may match part or all of the contribution, and you get to choose what to invest in, usually mutual funds. If you don’t have a 401k contribution plan, then set aside a substantial percentage of your monthly income for retirement.
While investing, focus on the long-term, always. Thus, if you already have a 401k plan in place, don’t change it because there is a bear market. Let it be. In the long run, the market will recover and your portfolio will thank you for enduring.
#4. Diversify Your Investments.
To do this, invest in a mix of stocks and bonds across multiple asset classes. This will help balance the risk of your portfolio.
In a bear market, hopefully, the less volatile investments can hold up your portfolio while the most aggressive are probably depressed.
There’s no guarantee that you won’t experience a few losses when applying any of the above methods. Therefore, make sure you’ve settled or set aside funds for your living expenses before investing.
The Bottom Line
A bear market is not the end of the world. It’s an opportunity for investors to buy low and sell high. There are other ways to capitalize on a bear market, like dollar-cost averaging and maintaining your 401k contribution plan. Also, don’t forget to diversify your investments.
With the right strategy and mindset, you can make a bear market work for you.
