Tips for Investing in a Bear Market

By Jean D. Koehler,Financial Advisor with Ameriprise Financial Services, Inc

Inmid-March, a fear-induced global sell-off triggered by the COVID-19 pandemic endedthe longest bull market in U.S. history — leading us into our first bear marketin 11 years. Bear markets are commonly defined as a decline of at least 20%from the market’s high point to the low during the selloff.

Ifyou compare your investment portfolio today to what it looked like at the beginningof the year, you are likely to be unhappy with what you see. But there’s also apotential upside to bear markets, as you may be able to capitalize on the factthat stock prices have come down across the board. Investing in a bear marketis possible, but it’s important to approach it with the right mindset. Here area few tips to keep in mind:

Diversify your portfolio

During a bear market,your focus should generally be on preservation. Diversification can help youaccomplish this. Essentially, diversification is just a fancy word that means“don’t put all your eggs in one basket.” While it’s true that the trend isdownward during a bear market, not all stocks will go down at the same rate. It’spossible that some might even thrive.

Reviewyour portfolio to see if it is properly balanced between stocks, bonds, andcash that align with your goals, time horizon and your ability to manage risk. Byhaving a portfolio that covers various sectors, you can mix your winners andlosers to help reduce overall losses.

Keep a level head

Bearmarkets are painful but temporary. The U.S. stock market has recovered fromevery previous bear market. Of course, the past is no guarantee of futureresults, but historically even the worst markets have been temporary dips in ageneral march higher for stocks.

Ifyou are in a well-diversified portfolio, your bear market experience will bevery different from that of the S&P 500. Sticking to your plan is key, soresist the urge to change the risk profile of your portfolio or make sizableshifts out of stocks or into cash.

Don’t attempt to timethe market

Ratherthan aim to buy stocks when they’re at a so-called low during a bear market,employ a strategy called dollar-cost averaging. Dollar-cost averaging involvesmaking regular investments of consistent dollar amounts over an extended periodof time. This allows you to build a portfolio and help protect against wildfluctuations while continuing to accumulate assets. It’s a smart strategy ingeneral, but one that can really pay off during a bear market. After all, it’snot about timing the market; it’s about time in the market.  

Look to the future

It’shard to predict how long a bear market will last, and in some cases, they canbe quite drawn out. As such, don’t invest in a bear market with the hopes ofbuying low and getting rich within the year. That’s unlikely to happen.Instead, take a long-term approach to investing, and assume that any stocks youbuy now are stocks you’ll continue holding for a number of years.

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