A bear market is defined as a significant drop in asset values from recent highs of at least 20%. These are not pleasant times, but fighting back may be harmful. We’ll go over eight key investment tactics and attitudes to help you keep cool and play dead when the stock market takes a bite out of your profits.
There Is No Place for Emotions in Wall Street
“The Dow climbs a wall of concern,” as the cliché goes on Wall Street. In other words, despite economic downturns, terrorism, and a slew of other disasters, the Dow has risen steadily throughout time. Investors should aim to keep their emotions out of the investment decision-making process at all times. What appears to be a great worldwide disaster one day may be forgotten a few years later as little more than a blip on the radar screen. Remember that fear is an emotion that may distort your ability to make sensible decisions in a scenario. Maintain your composure and carry on!
Accumulate with Dollar Cost Averaging
During an economic downturn, the essential thing to remember is that negative years in the stock market are normal—all its part of the business cycle. One option for long-term investors (those with a time horizon of 10 years or more) is to use dollar-cost averaging (DCA).
How Can Playing Dead Save You?
During a bear market, the bears are in charge and have control. It is said that the best thing to do in this situation is to pretend to be dead—the same thing you’d do if a genuine grizzly confronted you in the woods. It would be quite hazardous to fight back. You may avoid becoming a bear’s food by remaining calm without making any unexpected movements. In financial terms, playing dead entails investing a higher share of your portfolio in money market products such as certificates of deposit (CDs), US Treasury bills, and other short-term assets with high liquidity.
Diversify Your Resources
Diversification is defined as having a portion of your portfolio distributed among stocks, bonds, cash, and alternative assets. Your risk tolerance, time horizon, goals, and other factors all influence how you split up your portfolio. Every investor is in a unique scenario.
Have Room to Fall Back Into
Investing is vital, but eating and having a place to live. Investing in short-term cash inequities will most probably generate no profit. As a general rule, investors should not invest in stocks unless they have a five-year or longer investment horizon. They should never invest money that they cannot afford to lose. Bear markets, as well as modest declines, may be exceedingly damaging.
Train a Detecting Eye
For investors, bear markets may present fantastic chances. The key is to understand what you’re searching for. Stocks can be described as beaten, pummeled, and underpriced during a bear market. Bear markets are generally viewed as purchasing opportunities by value investors like Warren Buffett since the values of strong firms get pounded down along with the prices of bad companies, resulting in very attractive valuations. Buffett regularly increases his holdings in some of his favorite firms during market downturns because he understands that the market tends to punish even good companies more harshly than they deserve.
Choose Your Shares Carefully
Stocks that are defensive or non-cyclical do better than the entire market during downturns. Regardless of the general market situation, these stocks give a constant dividend and dependable profits. Household non-durables manufacturers, such as toothpaste, shampoo, and shaving cream, are examples of defensive sectors since consumers will continue to use these things in difficult times.