Bear markets can seem terrifying for new investors and experienced ones alike. It can make investing in stocks and bonds a difficult process and often pushes people away from the market as a whole. This article is going to explain what is a bear market. It will also cover how to identify one and offer ten tips to help you navigate the next bear market with ease.
What Is a Bear Market?
This section of our article is going to help you identify what is a bear market. A bear market occurs when a group of securities like stocks and bonds fall in price. It is characterized by massive amounts of selling and negative consumer sentiment. Another term that is often confused with bear markets is the bull market. A bull market is the opposite and is marked by rising prices and positive consumer opinion.
How to Identify Bear Markets
This section of our what is a bear market article is going to explain how to identify them. One of the main ways to identify a potential bear market is failed rally attempts. Rallies occur after a fall and are marked by a gradual increase in prices.
Another way to identify bear markets is to look for periods where institutions are beginning to massively sell their holdings. They do this in an attempt to reduce their financial risks since investors are less likely to purchase stocks as the prices continue to decline.
When business sector publications continue to announce negative news that is relevant to their area, it is another sign of a potential bear market. A prime example is Arch Coal that has released less than stellar earnings and continues to decline. In this example, this is a bear stock rather than a bear market.
How to Survive a Bear Market
1: Stop Loss Orders
The most important tip we will cover in our what is a bear market article is stop loss orders. Specialists created these orders to automatically buy or sell a stock once it reaches a certain price.
When you use them, you will automatically sell these stocks at the prevailing market price. It is a great way to reduce your potential losses during periods where the market is being particularly volatile.
2: Diversification
Diversification is key to the success of any portfolio. During bear market runs, it is especially important since it helps spread your losses across several different business sectors.
Certain markets are more susceptible to bear markets like energy and pharmaceutical. Consider spreading your investments evenly and make sure to keep holdings in companies that have established solid financial history.
3: Watch for the Lowest Performers
Take a look at the business sectors that bear market runs have hit the hardest. If the market has dropped 20 percent as a whole, a construction company that has dropped 50 percent has a chance at bouncing back first. Review the financial details of the company carefully to make sure it has the cash reserves necessary to make a healthy recovery first.
4: Invest in Companies with Brand Presence
One of the best strategies to try when navigating a bear market is to invest heavily in companies with brand presence. People respect a company with brand presence. Moreover, this type of company has a proven track record of delivering solid results.
They are also among some of the most recognizable companies around. Some prime examples include Google, Apple, Walmart, McDonald’s, and Coca-Cola. These companies have been around long enough to weather most bear markets without fear of long-term consequences.
5: Wait It Out
This investment strategy is a common one that many investors consider and use. Depending on the length of the bear market and the types of assets you hold, you may just want to wait it out.
This option is particularly useful for companies that bear markets do not have such a great impact on. A way to maximize this strategy is to move assets from riskier business sectors to safer options that are less prone to volatility while you wait.
6: Load Up on Growth Stocks
One of the best strategies to try when a bear market is potentially coming is to load up on growth stocks. Growth stocks have price-earnings ratios and earnings growth that are higher than the market average. These stocks have excellent potential for capital appreciation and can help round out portfolios during periods of general price declines.
7: Look for Value Investments
Another strategy to consider during bear markets is value investing. Value stocks are identified by their lower P/E ratios and often come with attractive dividend payments. They are a great way to help grow your portfolio during periods where the market continues to decline. Be sure to review all of the financial details that you can access when making a purchasing decision.
8: Don’t Forget Smaller Companies
While investing in larger companies is generally much safer, smaller companies can prove to be particularly lucrative during bear markets. Carefully examine the listings of stocks that have been performing well during the downward trend and look for companies that you are not familiar with. During economic downturns, some people might overlook these stocks which have very attractive pricing options.
9: Don’t Be Afraid to Sell
While investing with long-term goals in mind is key to success, you should never be afraid to sell. This is especially important during periods where the bear market is running for an extended period. Remember that you can always reinvest your capital at a later time once the market has stabilized.
10: The Tax Advantages of Losses
Earnings from the sale of stocks and dividend payments are taxed based on a complex tax code. Most of the earnings are assessed with a capital gains tax that varies based on your federal tax rate. For stocks that you have held for less than a year, they are taxed based on your current tax rate.
During periods of economic decline, remember that any losses you incur can be written off against your other capital gains. This provides a valuable way to reduce your tax bill significantly during bull market runs.
Let’s Recap
You should now have a sound understanding of what is a bear market. The most important thing to remember when investing is that you should always utilize a long-term approach. With that in mind, there are times where you should sell stock holdings to minimize your losses. Use these ten tips during the next bear market to help you survive.
