How To Invest During A Bear Market

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The last prolonged bear market in the U.S. occurred during the Great Recession of 2007 to 2009. That means many new investors today may have never experienced a true bear market before now.

That’s because, historically, bull markets have lasted significantly longer. But no market—bear or bull—goes on forever. The question is: Once the bear takes hold, how do you survive until the bull’s return?

What Is a Bear Market?

A bear market occurs when broad market indexes, such as the S&P 500 and the Nasdaq Composite, drop by 20% or more. By the time that threshold is reached, a bear market may have already done considerable damage to your portfolio.

“When you have a bear market, the bear will ultimately grab quite a bit before the bear market is even called,” says Quincy Krosby, chief global strategist at LPL Financial.

U.S. stocks were in a bear market for the better part of 2022, although there was a notable bear market rally over the summer.

“This time around, it was only when the big tech names—with a 21% weighting in the S&P 500—were brought down that the bear market was declared,” Krosby says.

How Long Does a Bear Market Last?

Bear markets typically last around 15 months. According to data from the Schwab Center for Financial Research, the longest on record lasted 2.5 years—while the shortest was only 33 days, in early 2020 at the outset of the Covid-19 pandemic.

When it comes to pinpointing causes, bear markets are complex and multifaceted. Historical examples include economic crises, such as the 2008 subprime mortgage crisis and the early 2000s Dot Com bubble.

The bear market of 2022 was sparked by high inflation, which forced global central banks to tighten monetary policy to cool off price gains. Unfortunately, this also plunged stocks deep into the red, and many commentators are worried recession is right around the corner.

Since bear markets are not short-term phenomena, it’s important to remain open that near-term stock market pullbacks can always turn into a bear market—and to prepare your portfolio to weather the storm.

“The quicker that people reevaluate their investments and incorporate new strategies, the better.” Tim Pagliara, chairman and chief investment officer at CapWealth, says. “The next ten years are not going to be like the past ten.”

Bear Markets Affect More Than Just Stocks

While bonds are less volatile than stocks, they can also experience prolonged drawdowns and losses. It’s entirely possible, albeit rare, for stock and bond bear markets to occur simultaneously.

Although that tends to be an anomaly, it’s the scenario that played out in 2022. At that time, the macroenvironment was tricky even for diversified portfolios.

However, fixed income markets have since stabilized and have turned out to be a safe haven for weary investors.

How to Invest During a Bear Market

Investing during a bear market doesn’t have to be complicated. Staying diversified, maintaining a long-term perspective, being mindful of risk tolerances and avoiding poor investment behaviors are the keys to success.

Here are a few tips for how to invest during a bear market.

1. Rebalance Your Portfolio

A diversified portfolio consists of multiple asset classes like stocks, bonds and cash. The ratio of each asset should be held according to your time horizon, risk tolerance and investment objectives.

Portfolio rebalancing usually means periodically selling overweight assets and buying underweight assets until your portfolio is back to its target asset allocation. However, during a bear market “…rebalancing may now include asset classes you didn’t own before, like short-term bonds or maybe even longer-term fixed income assets,” says Pagliara.

Of course, you might wind up selling winners and buying losers, which can seem counterintuitive. But you need to ensure your portfolio’s composition aligns with your desired risk tolerance and investment objectives.

2. Use Tax-Loss Harvesting

You can reduce your tax-bill while remaining invested via tax-loss harvesting. This is the practice of strategically selling investments in a taxable brokerage account at a loss and deducting the capital losses against capital gains or income tax.

You can reduce your taxable capital gains and offset up to $3,000 of your income. This is a great way to capitalize on your losses during a bear market.

But an important thing with tax-loss harvesting is the wash-sale rule. When you sell an equity for a loss, you cannot repurchase it or another “substantially identical” security within the next 30 days. This means you could miss a potential rebound.

3. Own Risk-Averse Assets

A bear market is a good time to assess whether your portfolio’s asset allocation really suits your risk tolerance. Of course, Pagliara says, everything carries risk. It’s simply a matter of which assets carry the greatest risk right now.

If the volatility in your portfolio is keeping you up at night, consider a higher allocation of the following more traditionally risk-averse assets:

Short-Term Treasurys

Treasury Bills, also known as T-Bills, are U.S. government-issued bonds with a maturity ranging from a few days to 52 weeks. They’re universally regarded as a “risk-free” asset for two reasons:

  • No credit risk: Unlike corporate bonds, Treasurys are backed by the full faith and credit of the U.S. government.
  • Very low risk: All bonds possess duration, a measure of their sensitivity to interest rate changes.

Certificates of Deposit

A certificate of deposit (CD) is a savings product offered by banks that promises both safety of principal and periodic interest payments for a fixed time.

An investor who purchases a CD commits to locking up their initial investment for a fixed period, such as six months, a year, two years or even five years. In return, the CD pays monthly or semiannual interest. Once it matures, you cash out the CD in return for your initial investment.

Unlike bonds, CDs do not possess interest rate risk. If rates go up, your CD will not lose value nor gain extra yield, but new CDs might pay more competitive rates.

The downside is that CDs do not allow you to withdraw your money before maturity. If they do, there may be early withdrawal penalties. CDs are also insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per account.

Fixed Annuities

Buying an annuity can be a good idea for low-risk investors. The most conservative type of annuity to buy is a fixed annuity. Unlike variable annuities, fixed annuities aren’t linked to stock market performance.

During the accumulation phase, the investor makes contribution payments. Later, the annuity kicks in during the distribution phase, where the investor receives a fixed rate of return for a set number of years.

4. Buy the Dip and Stay the Course

If you’re already holding a diversified portfolio, a good practice is dollar-cost averaging. Dollar-cost averaging is when investors put the same amount of money into their portfolios at set periods of time.

“With dollar-cost averaging, you have an opportunity to be flexible, which takes on bigger meaning in an environment like this,” Pagliara says.

Dollar-cost averaging doesn’t mean timing the market though. The reality is that bear markets can be unpredictable and prone to numerous false rallies, known as “bear traps.”

“There are always pockets of hope that draw in investors thinking the bear market is over,” Krosby says. That’s why it’s always a good idea to maintain the pace and amount of your investment contributions.

Long-term investors know that bear markets are to be expected. They’re a necessary part of the economic cycle. They simply tend to be less frequent and more short-lived than their bull market counterparts.

“With the current bear market, the Fed has a job to do, and that’s to restore price stability,” Krosby says. “This isn’t like 2008-09 or even the tech bubble unwinding.”

Although bear markets are an inevitable part of investing, they don’t have to be painful. By holding a diversified portfolio and practicing good investment behaviors, investors can survive and even thrive during them.

The best practice is to maintain a long-term perspective and stay the course.