Your investments in a bear market: how to come out on top

When the market drops as sharply as it did at the start of 2022, investing can be incredibly scary. It’s almost like you’re throwing good money after bad because every time you make a deposit you see a huge chunk of it seem to evaporate right before your eyes.

And when you see your account balances dwindling, it’s almost as if your future goals are fading before your eyes as well. Yes, when you look at your investments against a bear market, it can be ugly. Still, there is a reasonable strategy you can use to come out on top.

Image source: Getty Images.

First: Get your finances in order

Bear markets often lead to job losses. Even if you keep your job, life goes on and unexpected costs may appear when your inventory is running low. Therefore, it is important to have an emergency cash fund in an FDIC-insured account just in case. No, you won’t earn a huge return on that money, but you will have an extremely high probability that the money will be there if you need it. This can greatly reduce your risk of being forced to sell your stocks when they are falling in a bear market.

In addition to the emergency fund, it is essential to control your debts. It may be okay to invest when you have debt, but that debt really should have three key characteristics:

  • It should have a low interest rate. It makes no sense to borrow money at a higher rate than you can reasonably expect to earn on your investments over time. Even if it’s close, paying off your debt has a guaranteed rate of return, whereas stock market returns are never guaranteed.
  • It should have a payment you can afford without ruining your lifestyle. It’s hard enough to invest in a healthy market, but when the bear growls, the stress of a high payout makes it even harder to make smart decisions.
  • It should play a key role in your future. If your debt provides you with something essential – like a home, the ability to earn a living, or something you need to live on – the benefits may very well be worth the risk compared to the costs of maintaining debt.

Next: Recognize what stocks really are

Ultimately, a stock is nothing more than a partial stake in a company. This action takes its value according to the performance and prospects of the company over time.

As its stock price declines during a bear market, ask yourself why it is falling. It may be because the company’s future has deteriorated or the market is simply scared. If the company’s outlook still looks strong but its stock price is weak, you might have a good deal on your hands. Using a valuation technique such as the discounted cash flow model to search for these bargains can help you deliver better results.

In this case, a bear market may actually be a good time to buy more shares of a big company at a cheap price. This shift in perspective to focus on the business rather than the stocks can go a long way in helping you calm your nerves and make smarter long-term decisions.

Finally: Realize that no one succeeds every time

While investing can be a great way to build wealth over time, no investor is perfect at it, not even Warren Buffett. You will make mistakes. Also, even if your process is solid, sometimes business prospects suddenly deteriorate.

Therefore, it is important to have a diversified approach to your investments. Diversification won’t prevent bad things from happening to your portfolio. What it can do is reduce the impact that a single company stumble will have on your overall portfolio. This is an important part of being able to stay invested during a bear market and giving yourself the best chance of emerging in a better place on the other side of it.

Mix it up with a long term goal to beat the bear

When you combine a strong personal financial foundation with a value-based approach to investing and a healthy adherence to diversification, you have a powerful toolkit for beating a bear market. Remember that it will likely take time for the market to recover, so have the patience to let your stocks do their thing.

Over the long term, a company’s market price should respond to its fundamental business strength, not just market sentiment. With the patience to let this process unfold, you can finally put this bear market behind you.

By making today the day you put these pieces together, you are equipping yourself with a great toolkit to come out on top in a bear market. The sooner you start, the sooner you can start fighting back. So start harnessing the power of your inner bear hunter now.

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Chuck Saletta has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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