Five ways to make money in a bear market

Summary

  • Market conditions play a critical role in deciding the kind of returns received on investments.
  • The period of negative returns is the most challenging period for investors since no one wants to find himself amidst falling stock prices.
  • However, it is the time when your understanding of the stock market comes into play.

Market conditions play a critical role in deciding the kind of returns received on investments. While the bull market is identified with positive returns, the bear market is when stock prices come under pressure. A bear market is referred to an extensive fall in prices of assets of at least 20% from recent highs.

The period of negative returns is the most challenging period for investors since no one wants to find himself amidst falling stock prices.

However, it is the time when your understanding of the stock market comes into play. There are some strategies that you can use to withstand the bear market.

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Here are five strategies to survive and make money in a bear market:

 

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Don’t let fear drive your decisions

The best an investor can do amid a bear market is to remain calm and composed. Unfortunately, a bear market brings with itself lots of negativity, which can easily seep into the psychologies of investors. Thus, experts advise always to separate emotions from the investment decision-making process.

                     

Five ways to make money in a Bear Market

 

The famous saying -- “Tough times come and go, but tough people carry on” -- should help you remain confident in yourself.  It would help if you always remembered that fear can cloud the rational judgement of a situation. So, be calm and carry on.

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Investment re-allocation

Some advise selling investments to either hold cash or reinvest in more stable financial instruments to cut down the exposure of investments to the stock market as soon as one gets a hint of bear market approaching. However, you must be careful while doing so. You can also miss out on the gains by selling all investment holdings once the market rebounds after a fall. Therefore, you should properly measure the risks involved in this otherwise sound strategy.

Diversification

There is no better investment strategy than having your investment portfolio spread among stocks, bonds, cash, and other assets. The diversification should be done based on risk tolerance, time horizon, goals, etc. A similar diversification strategy cannot be applicable for all since every investor has a different mindset, risk appetite, goals, and strategy. So, every investor should chart out a strategy that suits all his needs and expectations.

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Dollar-cost averaging

Dollar-cost averaging is one wise strategy for long-term investors. You can purchase shares irrespective of price and end up buying shares at a low price when the market is bearish. Then, as the time proceeds, your cost will ‘average down’. You will finally have a better overall entry price for your shares.

Play dead when facing a bear

According to some experts, it is better to play dead during a bear market just as you would be advised to do when met a real wild bear in the woods. Trying too many moves can easily result in becoming the bear's lunch. In financial terms, playing dead refers to putting your investment portfolio’s larger portion in money market securities, such as Treasury bills.

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