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Investment Strategies to Withstand the Bear Market

Updated on: Jan 11th, 2022


4 min read

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When it comes to investments, there are two things you must be familiar with—a bull market and a bear market. This is because market conditions play a crucial role in deciding the returns for your investment. 

A bear market is a period of consecutive negative returns where the stock prices fall beyond 20% from the recent high. On the other hand, a bull market is a period when the stock prices rise continuously, i.e. by 20% after two declines of 20% each.

Investors get troubled when the share prices fall, unaware of how they can stay unaffected or minimise the losses. As they say, ‘Every problem has a solution, there are certain investment strategies that can keep you afloat during the bear market. Deciding on the best approach for you may depend on your risk appetite, the time horizon for investment, and other objectives.

Here is a list of strategies you can rely on to withstand the bear market.

Investment Re-Allocation

When you get the hints of a bear market approaching, you can think of this most extreme and safe option of selling all your investments to either hold cash or reinvest in more stable financial instruments, such as short-term government bonds. This will reduce the exposure of your investments to the stock market. However, selling all investment holdings called capitulation can miss out on the rebound and lose on the gains. 

If you are determined to profit from a falling market, you can go for tactics, such as short selling or buy shares of an inverse ETF. These will increase in value as the market declines. Remember that these tactics are also associated with some level of risks. 

Defensive Strategy

You can choose this strategy if you wish to maintain your position in the market irrespective of the market conditions. In this strategy, you are advised to invest in large corporations having a long operational history and strong balance sheets. This is because stable, large-cap companies are usually less affected by a downturn in the stock market. Therefore, their share prices will be less vulnerable.

If you think about which companies will fall into the defensive stocks category, it can be food providers or staples producers. Irrespective of the market conditions, people still need food and other staples, such as toiletries. These companies may include huge cash at hand for operations and are likely to survive any market downturns.

In contrast, small companies may find it challenging to survive downturns due to the lack of financial resources and security.

Dollar-Cost Averaging

Since the stock prices fall during the bear market, it is easier for you to buy more stocks at a lower price. According to this strategy, you invest a small and fixed amount in the stock market every month regardless of how the market performs. It is recommended that you choose stocks that have value and pay dividends. Dividends lead to gains from equities making the bear market less painful for you.

Diversifying Portfolio

In addition to your investments in the broad categories of mutual funds, invest in alternative investment instruments unrelated to stock and bond markets. So, when stocks crash, you can benefit from the rise in bond value. However, this may not always be the case.

Bear markets could be disappointing as you see the stock prices falling, in turn, inducing losses. However, get expert advice and make some smart moves to make the most of any market conditions. Also, a little patience can do the trick at times.

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