How to invest in a bear market in 2022

Watching the value of your investments plummet can alarm even the most seasoned investor. However, these market downturns, known as bear markets, are part of the investment game. And while bear markets are far less fun than the good old days of bull markets, there are tactics to overcome them. These tips will help you understand how to invest in a bear market.

What is a bear market?

First, it helps to understand what a bear market is. A bear market is a market decline defined as a price drop of 20% or more from recent highs. Bear markets can refer to equity indices, asset classes or even individual stocks, although they usually refer to equity indices.

Prices do not necessarily fall continuously during a bear market. There can be significant spikes in asset prices, however, even with these spikes, there is an overall downward trend.

Can you make money in a bear market?

Yes, you can make money by investing in a bear market, especially if you invest for the long term, as bear markets offer the opportunity to bargain for stocks.

During the short-lived bear market in March 2020, nearly all stocks across all sectors were hit, including those that were fundamentally solid and not underperforming.

The same is true for the 2022 bear market. There are solid stocks trading at a low price, which offer the opportunity to buy low and earn attractive returns once the markets turn positive and prices start to rise.

However, there are some precautions to take in your investment strategy if you invest in a bear market:

1. Make sure you have enough liquidity available to amortize at least six months of expenses, especially as economic conditions are unfavorable.

2. Be able and willing to accept losses on your investments as prices can continue to fall, even from 52 week lows.

3. Research the stocks you are considering buying carefully to make sure they have positive indicators.

What investments are good in a bear market?

These investments can provide some relief during a bear market.

Some sectors

Some sectors are less affected by bear market conditions than others. For example, sectors that supply basic necessities such as basic necessities, health care and public services generally do relatively well as the demand for their products continues despite unfavorable economic conditions.

Dividend shares

Other stocks to consider during a bear market are dividends. Dividend stocks protect with their guaranteed income. Regular dividend payments also help ease the pain of rising prices due to inflation. A great place to start for dividend stocks are dividend aristocrats, stocks that pay dividends and consecutively increase their dividend yields for over 25 years. Try TipRanks Dividend Center to discover dividend stocks and calculate estimated returns.

Stocks with low P / E ratio

It is important to pay attention to the price / earnings (P / E) ratio during a bear market. Value stocks with a low P / E are more likely to perform well than growth stocks with a high P / E ratio.

Gold

Gold is also considered to be a safe haven during a market race to the bottom. The price of gold is unrelated to the stock market and often rises during volatile markets. Liquidity can be an option during a bear market, however, with inflation at 8% in the 2022 bear market, holding liquidity for an extended period is likely to hurt.

Short selling

There are ways to profit from falling stock markets, for example by participating in short selling, options trading, and investing in index funds. However, make sure you are aware of the risks and understand your risk tolerance.

Tips for investing in a bear market

Warren Buffett’s famous advice to “be fearful when others are greedy and greedy when others are afraid. If you want to invest in a bear market, there are some essential tips that can help you protect your investments and generate profits.

1. Keep calm

Don’t panic during a bear market. Selling at a loss when markets historically could cause regrets. The one exception is the 1989 Japanese stock market crash which has yet to recover.

2. Invest for the long term

Investing in the stock market for a long time is one of the best ways to protect your investments in a bear market, especially if you don’t need to liquidate your investments quickly. A bear market is not a good time to invest in the short term.

3. Don’t try to time the market

It is impossible to time a bear market and you may miss the opportunity to buy hidden gems if you try.

4. Pay close attention to when prices start to turn

An uptrend can signal the end of a bear market’s volatility and an opportunity to enter and buy stocks with less risk.

5. Diversify your investments

Asset allocation is particularly important during bear markets. Investing in bonds is one of the best ways to hedge your portfolio in a race to the bottom as bonds are inversely related to stocks. When stocks go down, bond yields go up and vice versa. In the US, the I Bond appears to be one of the best hedges in the current market downturn paying very high yields.

6. Adopt a dollar cost averaging strategy

Keep making small stock purchases. This averages the purchase cost of your investment over time. It is also a way to ensure that you take advantage of low prices and stay invested for the long term.

7. Invest in shares with dividends

As mentioned, dividend stocks can offer protection. Not only will dividends act as a buffer for your investments, but once the bear market turns bullish, these investments will pay off handsomely.

8. Conduct research

Build your investment portfolio consistently with a mix of all of the above through proper research. Don’t be all-in or all-out during a bear race. TipRanks can help you conduct data-driven equity research and make smart investment decisions.

How long will this bear market last?

It is impossible to know how long this bear market will last.

According to Hartford Funds, an average bear market phase lasts 289 days (9.6 months). Compare this to the average bull market phase lasting 991 days (2.7 years) and you will have all the confidence you need to withstand the current market downturn.

Notably, Hartford also revealed that half of the S&P 500’s best earning days in the past 20 years have occurred during a race to the bottom. Hence, putting the strategy of being invested for the long term into perspective during a bear market.

Some of the most important bearish events in history are the Great Depression of the 1930s, the dot-com bubble of the late 1990s, the housing bubble of 2008-2009 and the shortest bear market to date witnessed during the pandemic. of COVID-19 2020 (33 days).

During a bear market, investor sentiment is low and pessimistic. As a result, investors sell the holdings, which results in a further decline in market prices. Ultimately, investors view low prices as a buying opportunity that can signal the end of a bear market.

Bear markets are not to be confused with market corrections. During corrections, indices or stocks fall 10% or more from their recent highs. A stock market correction may or may not end up in a bear market phase.

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