How to Invest in a Bear Market. S&P500 officially entering bear market… | by Sharyph | Oct, 2022
The S&P500 is officially entering bear market territory, or falling 20% from its recent high in May of this year. And there could be lower stock market declines coupled with lower investor sentiment and confidence, making it a very scary time to invest at all. But in this post, I want to share with you some investment strategies and things to consider when investing in a bear market.
And by following these tips, you will be able to navigate this bear market and come out on top.
Avoid leverage
So let’s get started, my first tip for investing in a bear market is to avoid leverage at all costs. This is because bearish markets come with higher price volatility, so a leveraged position only takes one bad hit against you to wipe you out completely.
If you use too much leverage, or if you have a margin account with a brokerage firm, you can typically get 2 to 1 leverage, which means you can buy stocks that are twice your portfolio value.
So if you deposit $25,000 in cash, you can buy $50,000 worth of stock with a margin of 2 to 1.
If you are a leveraged investor, you may face the pressure of a margin call when your brokerage firm calls you and tells you that you need to add more collateral to the account or start trimming to reduce your leverage on your account.
And if you don’t, that brokerage firm can liquidate your position for you to reduce that leverage. And that would mean being forced to sell in a down market, this is really the time to buy and build your positions without being forced to liquidate them.
Dollar Cost Averaging
The next strategy is literally designed for bear markets and that is Dollar Cost Average.
Dollar cost average means you regularly buy stocks or other assets with generally fixed investment amounts, which may mean buying $100 worth of stock every week or month.
Calculating the dollar cost in a bear market is compelling because it allows you to profit, or at least break even, much faster than if you stopped investing altogether when prices were falling.
Get cash help
So when we’re in a recession and a bear market, it definitely makes sense to be more conservative and put yourself first and build a bunch of cash so you can continue to support yourself and your family.
Inflation currently stands at 8.6, which means the purchasing power of the US dollar is falling at 8.6% per year. Well, that thought alone can encourage us to invest every single dollar we have because the only way to earn 8.6% or more is by investing in risky assets. But the truth is that, compared to losing 8.6% over the course of a year, investing money in a risky asset to beat inflation means we are exposing that money to losses that exceed 8.5% be able.
Therefore, holding cash for the short-term is a good strategy. But holding cash for the long term when inflation is this high isn’t a good strategy.
It’s important to balance these two things. And who knows? Maybe the economy is doing better and you don’t have liquidity problems. But now you have that money, and you may have the opportunity to invest that money at even lower asset prices than before the next tip is about selling at a loss.
I know we don’t want to sell assets if the market falls but if you run into liquidity issues or lose your job then if you have some investments if so that’s the place to go to raise some cash is by selling some of your investments.
diversification
Typically, the older you are and the more wealth you have, the more diversified you want to be as this is a very secure way of preserving your capital. But the younger you are and the less money you have, the less diversification and more concentrated bets you can usually avoid because if they go wrong you lose all the money in those concentrated bets. You’ll still have career earnings for a lifetime to make up for those early losses if you take those bigger risks from the start, no matter who you are.
Being diversified is never a bad idea as it eliminates a single point of failure in your investment portfolio.
If you have 10 different positions and one of those positions goes to zero, then your entire portfolio will not go to zero. According to a recent CNBC article, they found that the average bear market lasted 19 months, with the S&P 500 dropping 38% on average.
Right now we’re in this bear market for four or five months.
The S&P 500 is down about 20% year-to-date. And the high was made in January. So we’re just getting started with this bear market. Of course, every bear market is different and we don’t know when it will end. But in the meantime, take advantage of the turmoil and avoid selling at all costs, keep adding to your favorite positions and reduce your average cost of those positions, making it much easier to break into profitable territory on the next bull run.
Assuming you don’t have cash flow problems associated with a recession combined with the bear market, it’s a good idea to continue investing in your favorite positions and adopt a wealth-building mindset and think long-term.
That’s what I do when I’m investing in a bear market. I really hope you enjoyed this list. If you have any feedback for me, leave a comment below.
If you have a solid knowledge of trading, check out this course from me and learn how to make money regardless of market movements. I think this is a good time to study and get some extra income.
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