How to make money even in a bear market
The words “bear market” send many a shiver down one’s spine, whether one is a seasoned investor or a newbie. Indeed, what is a bear market and how can this elicit such a strong feeling from the investing public?
According to Investopedia, a bear market is a “market condition in which the prices of securities are falling, and widespread pessimism causes the stock market’s downward spiral to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, over at least a two-month period, is considered an entry into a bear market.”
However scary a bear market sounds, there are still many opportunities it can provide the patient and wise investor in building his wealth and portfolio.
How can you protect your hard-earned capital during this period? When do you buy and sell? What do you do to make this a “bearable” time?
Here are some tips on how to not only survive a bear market but how to thrive in it:
Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful.”
In a bear market, everyone is fearful and panicking. Instead of selling your entire portfolio without even thinking, you should review your portfolio and analyze if reallocating can boost its chances for recovery.
You can cut loss and shift to better stocks. If you are being rational, you can time the shifting in such a way that you are not selling at the bottom. Remember, even during the bear market, stock prices can still go up.
Search for good stocks
You can use this time to look for good stocks to buy. In a bear market, you can see both the bad and the good companies getting sold down. The bad issues do not get to recover but the good issues do recover because of their intrinsic values. Try researching on which companies have solid sales and revenues, have a bright forecast and good fundamentals that can withstand a bear market. This can signal a buying opportunity!
Look for dividend-paying stocks
What are dividends and why is it important to investors especially during a bear market?
According to Wikipedia, “A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or a surplus, the corporation is able to re-invest the profit in the business (called retained earnings) and pay a proportion of the profit as a dividend to shareholders.”
Dividends come from a company’s profits. In a bear market, most companies get sold off—even those that have good profits and can thus give the investor dividends. Search for these companies because they can give additional income from the dividends aside from the capital appreciation one expects after the market recovers from a bear market.
Change strategies and sectors
When the economy is doing well, the strategy is to buy cyclical stocks. According to Investopedia, “A cyclical stock is an equity security whose price is affected by the ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items consumers can afford to buy more of in a booming economy and cut back on during recession.”
Thus, during a bull market, increasing one’s portfolio of cyclical stocks would help one do well. These stocks are companies that deal with the “wants” and usually outperform the broader market during a good economy.
When a recession is looming and the economy is slowing down, a change in strategy and a rotation of sector is needed. Buy defensive stocks during this time. According to Investopedia, constant dividend and stable earnings regardless of the state of overall stock market. Because of the constant demand for their products, defensive stocks tend to remain stable during the various phases of the business cycle.” Typical defensive stocks include those belonging to the consumer staples, utilities and sectors that deal with human needs. These companies usually exhibit consistent growth in profit.
Do peso cost averaging
Princeton Economist Burton Malkiel says, “I have never known anyone who could consistently time the market. And in fact, I’ve never known anyone who knows anyone, who was able to consistently time the market.” Warren Buffett corroborates this, “People that think they can predict the short-term movement of the stock market—or listen to other people who talk about (timing the market)—they are making a big mistake.”
It is very hard to time the market, more so in a bear market when everyone’s emotional and panicking. More often, you may not have the courage to buy a stock at a low price even if you have done the proper research.
Doing peso cost averaging will help you have the discipline and courage to invest on a regular basis. According to iMoney. ph, “Peso cost averaging means you buy stocks or securities for a set amount of money each month or quarter over the medium to long term. This could be as low as 1,000 a month for three years, or as high as 100,000 every quarter for five years. The amounts and time frames are up to your budget.”
Peso cost averaging is flexible enough. You can set an amount that you can afford to place in the market at a schedule that you program yourself. The important thing is that you do it regularly and consistently. This lessens your risk as it averages out your losses or gains over a long period of time.
Be a more well-informed investor
Take this time to study and learn more about the stock market and investing in general. It is important to know yourself, the risks you are willing to take, and the time horizon you are willing to hold on to your investments.
Knowing these, you will have a better grasp of what stocks can fit your investment objectives. Use this time to read books, attend seminars and courses that can give you a more global and holistic perspective in investments and in the stock market. Doing this will help you not only weather a bear market but also do well when the market recovers.
This article, written by Carissa Patag (WealthSec Head of Sales), first appeared on MoneySense Magazine.