How You Should Be Investing in a Bear Market

As a beginner, it can be difficult to know what are the best strategies to use when investing in a bear market.  Everyone else seems to be running for the hills, pulling their cash out of the market.  Which may make you wonder, should I even be investing in the first place? Is it too risky?

Well, that depends - mostly on you.  Will you be investing in index funds or individual stocks?  Will you be investing long term or short term?  

Investing in index funds is less risky than buying individual stocks.  While investing long term is not as risky as investing short term.

There is plenty of money to be made in the market.  Whether you will be a successful investor in any market depends on how you invest. You could either strike gold or lose a substantial part of your savings.  

So let’s take a look at some strategies.

Here are the 5 steps to Investing in a Bear Market:

1. Don’t Try to Time the Market
2. Invest in Index Funds
3. Find and Buy Great Companies
4. Don’t Follow the Herd
5. Dollar Cost Average 

Don’t Try to Time the Market

 “Trying to time the market is a loser’s game.”  - Christopher Davis

Everyone knows the saying, “Buy low, sell high.”  It is the best rule for any business venture.  The lower you buy and the higher you sell, the more profit you will make.  

And so it is with the stock market.  Investors want to buy at the lowest possible price and squeeze out as much profit as they can.  So what do they do?  They try to time the market. This is especially so in a bear market.

It is a trillion dollar industry where mutual fund managers can make millions or billions based solely on their perceived ability to time the market and maximize returns for their investors.

But like Christopher Davis said timing the market is a loser’s game.  No one thus far has been able to do it consistently over time.  These mutual funds tend to have lucky a year or two but not for long.  The problem is many people believe the hype.  They either think they can figure out how to time the market or can pick someone who can.

Unless you are one of those people with the gift of foresight, predicting the future is impossible.  You don’t want to find yourself waiting on the sidelines for the bottom when you could have been investing while the stock market was on SALE! 

I’m not sure if it’s our aversion to loss or our need to analyze everything and solve the greatest question of all time, but there are so many investors who will still sit on the sidelines trying to determine if the market has bottomed out yet.

To Sum It Up

Time in the market is so much more important than timing the market.  So forget about trying to time the market and just get into the game.  Winning big in the stock market is about consistency and investing for the long term.

Invest in Index Funds

“By periodically investing in an index fund… the know-nothing investor can actually outperform most investment professionals” – Warren Buffet

Investing in index funds during a bear market is a great way to hedge against the market going lower.  Index funds are made up of lots of individual stocks.  

Therefore, if the price of one stock goes down, the index fund, overall, won’t be as affected as compared to an investment in just that one stock.

You will find that although some stock market crashes have seen losses of 80% or more in a particular company, the losses of index funds would not be quite as bad.  Index funds provide a buffer against huge losses when investing in a bear market*.  

So even if you have a high risk tolerance, you’ll be better off investing at least some of your money in index funds.  

Specifically, total stock market index funds.  Those are the ones I like the most.  These funds track the total stock market.  So the provide the best protection against stock market crashes.  

In addition, because the stock market tends to go up over time, you know that eventually the value of your purchased stocks will increase.

*Note: Sector or other very specific index funds can be hit hard or harder in an economic downturn.  So investing in total stock market index funds are best. 

Find and Buy Great Companies

“Bad companies are destroyed by crisis, Good companies survive them, Great companies are improved by them.”      - Andy Grove

If you do decide to go the individual stock investing route, you could potentially make a lot of money when the stock market rebounds.  That is, if you invest in great companies.

The trickiest part of investing in individual stocks is finding a great company that is going to be around for at least another 30 years.  It takes time to comb through financials to see if they are using their money efficiently.  

It takes more time still to ensure that they have good leadership who is going to make the company even better.

The Financial Statements

As for financials, you would want to take a look at three key statements: the income statement, the balance sheet, and the cash flow statement.  

The cash flow statement, like its name suggests, is a look at how the cash is flowing into and out of the company. 

The income statement gives you a peak at their earnings (which should be increasing year to year) while the balance sheet gives you a peak at their assets and liabilities.  

Although I look at all three for various reasons, I spend more time going over the cash flow statement.  This statement will tell you if the company is using their cash efficiently or not.  

You can see what they are spending their money on.  Are they buying back company stocks? Have they taken on more debt? 

All of that is visible on the cash flow statement.  Furthermore, you can see just how much cash the company has on hand.  Especially when investing in a bear market, it is good to see just how much cash a company has at the ready in case of emergencies.

But the beauty of investing in a bear market especially a deep one, is that almost everything is a bargain and you can find great companies going for less than half their worth.

Don’t Follow the Herd

“Just because Susie jumped off a bridge doesn't mean you should too.”  - Every Mom Everywhere

Normally, when you see people running towards you, you automatically turn around and start running with them.  This is for good reason as the cause of such a stampede is likely trouble.  

But this kind of reasoning is dangerous when you are investing in stocks.  Following the herd can lead you to make poor financial decisions and significantly reduce your overall returns.

Letting Emotions Get the Best of You

Buy Low, Sell High.  That’s the motto. That is how you can maximize your returns and get the most out of your money.  

That means you should be buying when the prices are low (a bear market) and selling when the prices are high (a bull market).  Pretty simple, right?

Surprisingly, it is not.  Too many investors jump on the band wagon of euphoria and the idea of making a quick buck that they tend to buy more when prices are high.  

Then when the stock market crashes they are swept up in the panic of the masses and are afraid of losing all of their money.  So they sell.  They have just bought high and sold low.  Definitely not what you want to do. 

Remember that even if your stocks decrease in value, it is just a paper loss**.  Those losses only become real when you sell.  So don’t sell.  

Instead, ride out the storm knowing that the stock market always goes up over time.  It will go up again.  

**For individual stock investors, you will have to do a little more homework.  Look over the companies financials again to see if they are still a great company or not.  If not, you may need to sell to prevent further loss.

Dollar Cost Average

"Dollar cost averaging is a tool - an arrow that should be in everyone's quiver."    -CFP Diane Rolfsmeyer 

Dollar cost averaging is simply investing the same amount of money into the stock market on a regular basis, usually every month.  It’s generally the best method for most investors as it can be automated easily.  

Also, by dollar cost averaging, you can make sure that you don’t get caught up in the emotional rollercoaster that investing in the market can be.

Dollar cost averaging into the market removes the temptation to try to time the market, which typically ends up costing you money.  

What’s more, is that by doing so you will, overall, pay less than the average price of the stock over time.  

This is because if you are investing $500 every month no matter what, when stocks are expensive, you, by default, buy less of them and when stocks are on sale, you will end up buying more. 

What About Investing a Lump Sum?

Of course, if you do have a lump sum of money just wasting away in a savings account, you can just put it into the market all at the same time.  

Although in a bear market it is better to dollar cost average, it depends on your personality.  As long as you’re okay with possibly “missing out” on an even lower price, then go for it and go all in.

Lump sum investments are typically better during the early stages of a  bull market.  But you don't want to get in the habit of trying to time the market so keep your investment strategy simple.  

When investing in a bear market, dollar cost averaging ensures an above average return. 

All in All

“Be fearful when others are greedy. Be greedy when others are fearful.”  - Warren Buffet

Any market can be risky if you don’t know what you are doing.  But as long as you’re willing to study the market and the right investing strategies, investing in a bear market doesn’t have to be.  

But keep in mind that quote from Warren Buffet which pretty much sums it up.  When the market is up and everyone is in a buying spree, you should not be making it rain like Japan during its rainy season.  

Instead, when everyone is pulling their money out of the market due to fear, is the exact moment you should be looking to buy more.

So should you be investing in a bear market? YES!  How? Well hopefully by now you know how! ; )  Thanks for reading! 

Related Questions

Does anything change if I am investing into my 401k?

Nope, nothing changes.  Just keep dollar cost averaging as per usual.  Although one thing to note about investing in tax advantaged accounts like the 401k during a bear market is that it maximizes your future growth.  

Because these investment vehicles allow your money to grow tax free, when the market starts going up, you will have bigger gains than someone investing in regular taxable account.

I don't have an investment account.  Where should I open one?

What index funds are should I invest in?

If I were you, I would keep it simple and just invest in total stock market index funds.  By investing in just these 3 funds, you should be covered.  But be sure to do your own research to figure out which investment options are the best for you.  See the table below.