For most investors a bear market is a time of panic and uncertainty. But bear markets are in fact a time of opportunity and should be looked at with the mindset of shopping at a bargain sale.
Simply put, a bear market is a period of time which stock market prices continue to fall. This is where the opportunity waits, as bull markets drive the valuations above what may be considered a fair price. On the flipside, bear markets can bring great companies back down to a fair price or less, which means it’s the perfect time to add them to your portfolio.
This is only one part of investing through a market downturn, there are a few key things to know when we enter a bear market.
Stay Calm
It’s easy to let your emotions take control of your decision making when a change in market conditions begins to appear. After a decade long bull market, seeing red for consecutive days or weeks can cause a panic which sees investors running for the door.
This leads to the most common mistake, which is selling your investments when the market starts to dip, creating a loss (or perceived loss if the holding is still positive) and being out of the market when they start to climb again. Time in the market achieves higher returns than timing the market and by missing some of the best days you are limiting your chance of satisfactory returns.
Don’t be afraid to ask for help
If the idea of staying calm is easier said than done, you shouldn’t be afraid to reach out for advice from your trusted adviser. A good adviser will provide you with the advice you need to weather a tough market and prevent you from making any short-term decision which may negatively impact your long-term financial goals.
Keeping a long-term mindset
While the markets tend to fall faster than they rise, they also go up more than they go down. Having a long-term plan which supports your goals and objectives will allow you to stay focused on the bigger picture. This means that if you can block out the short-term fluctuations, when the market recovers so will your investments.
Diversification
Portfolio diversification can be a tricky one if you’re not ready for a bear market. Be proactive before a bear market begins and diversify your portfolio with a mix of equities, fixed income assets such as bonds, alternative assets and cash. This will help lessen the potential short-term losses and have you positioned to use surplus cash to buy stocks at low prices before market conditions improve.
Understanding the bull and bear relationship
The above tips are all great for navigating a bear market but understanding why these market conditions arise is equally important. Market ups and downs are all a part of the economic cycle and knowing that bear markets are normal and a healthy thing for the economy will rest your anxiety. Turning the fear of a bear market into excitement for opportunities to achieve some growth in your portfolio will ensure you start making the right decisions and bring you confidence in your long-term financial goals.
Any advice given in this article is general in nature and does not take into account your personal situation.