Investing during Bear Markets

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Investing during Bear Markets

Successful investing in bear markets can involve many different strategies. Some investors try to secure their assets in less-volatile securities such as fixed-income bonds or money market securities. Others wait for the downward trend of prices to subside.

Things To Know

  • Some investors seek to take advantage of the falling prices.
  • Defensive stocks perform well in both bull and bear markets.
  • One can time the market to take advantage of a bear market.

When investors start buying

When it does, they begin buying. Still others seek to take advantage of the falling prices. When the market goes down, portfolios with a greater percentage of bonds and cash fare well because their returns are fixed. Many financial advisors emphasize the value of fixed-income and cash equivalent investments during market downturns.

Another strategy is to simply wait for the downward prices to reverse themselves.

Defensive stocks have an advantage in bear markets

Investors who wish to remain invested in stocks may seek out companies in industries that perform well in both bull and bear markets—shares in these companies are called defensive stocks. The food industry, utilities, debt collection, and telecommunications are popular defensive stocks. However, as with any investment choice, there is no guarantee that a defensive stock will perform well during any market period.

Timing the market

Finally, some investors attempt to exploit profits from the downward price movements. One method is to sell at the beginning of a downward turn, when prices are still high. Proponents of this strategy wait for prices to bottom out. However, as simple as it sounds, this process involves timing the market—a task that no mere mortal has demonstrated he or she can do consistently.

Selling short when prices are falling

Another, more complicated way to attempt to profit from falling prices is called selling short. Selling short occurs when you "borrow" a security from your broker and sell it with the intent of re-purchasing it in the future to repay the loan. You might sell short if you believe the price of a security is going to drop significantly and you could re-purchase it at a price significantly below the price for which you sold it.