Bear Market Investing Strategy: What Stocks to Buy?

Let’s face it: A bear market is inevitable. While the bear market can create a difficult situation for investors, you can find ways to avoid becoming a victim of the market’s ups and downs. If you want to see the best possible impact on your stock investment portfolio during a bear market, knowing which stocks to buy can make all the difference. Keep these tips for bear market investing in mind as you decide where to invest.

Key Takeaways

• A bear market calls for an abundance of caution, but that doesn’t mean you should stop investing during this period.
• Build a solid safety net before investing during a bear market.
• Create a balanced portfolio with safe stocks, including those that reflect recession-proof products.
• Stocks with low price-to-earning ratios often experience growth during these times.

Understand the Bear Market

The first step in building a bear market investing strategy is to understand what a bear market means. A bear market is one in which the market index falls by at least 20% from its most recent high. This drop can occur over a prolonged period, which means you’ll want to be prepared for the worst.

During a bear market, many investors have low confidence. They’re often selling as quickly as possible, which only serves to pull prices down further. As you analyze stock market news and trends, you’ll want to be especially cautious.

Build Up Your Savings

Before you invest in anything during the bear market, it’s a good idea to have stable resources. You don’t want to worry about running out of cash during a bear market, no matter what kinds of investments you’re making. In fact, it’s a good idea to have at least six months of living expenses saved in a bank account before you invest. This ensures you aren’t blindsided and have a protective financial cushion if your stocks take a turn for the worst.

Once you’ve got your savings account established, it’s time to build your portfolio. With this cushion, you’ll be prepared for economic downturns and any losses that might occur with the riskier investments you might make during this time.

Improve Your Dollar-Cost Average

If you already own stocks and want to put more money into the investments you’ve already made, focus on improving your dollar-cost average. This requires investing small, equal amounts of money in a stock over a longer period. Doing so can help even out your purchase price over time, helping you bring down a high average cost per stock.

It’s important that you don’t pour all your money into a stock at once, even if it’s taken a dip. Simply because a stock has dropped significantly, perhaps even close to 50%, does not mean it won’t drop lower. It’s extremely difficult to pinpoint a stock’s lowest value. Small purchases will be your friend during this time.

Consider Sectors With Steady Returns During Bear Markets

During a bear market, some sectors perform well regardless of market conditions. These are the sectors that involve products people need no matter what is happening with the economy. Consider, for example, medical care, household supplies, and fuel as part of your diversified portfolio.

Advisors typically recommend buying a mix of stocks so you can establish a more balanced portfolio and a steady return on your investments. You might also look at the volatility of the stock you’re considering before you decide to buy it. This will provide some insight into a particular investment’s stability. When the market experiences a shock, low-volatility stocks can provide some protection.

Think About Dividend Stocks

Dividend stocks are often great options for investors when inflation is rising. They provide guaranteed income that can help pad your investments. Plus, you might want to have these stocks on hand for those times when the market takes a turn and becomes bullish, causing share prices and buying to increase. Even during a bear market, you might see yields increasing significantly. You can then funnel this passive income into additional investments.

Choose Stocks With Low Price-to-Earning Ratios

When you look at the P/E ratio of a stock, you can see whether it’s currently under or overvalued. A stock with a low P/E ratio has a low ratio of price to earnings. When the ratio is lower, you are paying less per dollar compared to the company’s earnings. These stocks are more likely to perform well in a bear market, especially if you can get a great deal on them initially.

Short Selling Can Have Some Gains

In a bear market, short selling can lead to profit. If you want to use this strategy, you’ll sell borrowed shares, only to buy them back at a reduced price. While this can be an effective strategy for some investors, it’s a risky move that does not come with guarantees.

Diversify Your Bonds

Holding a variety of bonds, including corporate and municipal bonds, will also be critical during this time. Ensure your bonds have different maturity dates to make the most of your portfolio. A variety of medium and long-term bonds will be most useful during a bear market. Now is not the best time for short-term investments. Ultimately, a variety of bonds will provide a safety net in the event your other losses become more profound.

A Financial Professional Can Provide Guidance

If you’re looking to build a market investing strategy catered to your existing portfolio, you might find working with a financial adviser is a great way to do so. Together, you can structure a portfolio that helps you avoid making decisions too quickly. A financial adviser can also help you build an effective strategy for when the bear market transitions into a bull market.

Even though a bear market can be intimidating, it can still be a good time to invest. You can set yourself up for a financially sound future by making great investments. Get free investment tips and resources by becoming an Infinity Investing member today.

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