How to Invest in a Bear Market

Editor's Note: This story comes from Wealthramp.

How many times have you beaten yourself up recently over the drop in your portfolio? You think, “Maybe if I didn’t invest so much” or “What was I thinking buying that stock?”

It’s natural to want to blame yourself if your portfolio is losing money. But that behavior will cost you if your knee-jerk reaction is to pull your money out and sell off your stocks.

Wall Street is teetering on the edge of a bear market. Bear markets tend to strike fear in the hearts of investors, prompting many to rush to sell off their stocks before they lose any more money.

But a bear market isn’t something to necessarily be afraid of. In fact, a common saying on Wall Street is “bear markets are where millionaires are made.” Billionaire Warren Buffett, CEO of Berkshire Hathaway, is a perfect example.

Here’s what you need to know about bear markets — and how to come out of them ahead of the game.

What Is a Bear Market?

A bear market is considered a period when stocks drop by more than 20% for at least a two-month period. Bear markets often occur when there is a downturn in the economy and a looming recession.

The current ups and downs in the market are nothing new. It’s happened before, and it will happen again. This is breathing in and out, folks.

Some examples of a bear market in the past happened at the onset of:

• The Great Depression between 1929 and 1932
• The 1970s energy crisis from 1972 to 1982
• The Great Recession of 2007-2009

As scary as they may seem, bear markets don’t tend to last very long. The average bear market lasts about 13 months before stocks start to rise again.

Here are several strategies you can take to ride out a bear market and come out on top when it ends.

Resist the Temptation to Sell

When stocks are falling and you’re watching your portfolio dwindling away, you may start to think about selling and cutting your losses. But, remember, what goes down must come up again.

Bear markets can be relatively short, and if you stay the course with your investments, the return could be well worth it when things turn bullish again.

Be Proactive, Not Reactive

Reacting every time there’s a move in the market isn’t a wise investment strategy. Reactive investing is the best way to lose money.

Being proactive about your investments can help you stay focused on your long-term goals despite the ups and downs that may be happening in the market.

Diversify Your Portfolio

Diversifying your investments is a smart thing to do, whether it’s a bear market or a bull market. You should never put too many of your eggs in one basket. By investing in different sectors and assets, if one sector is down, your whole portfolio doesn’t go down with it.

It can be tempting to want to put all your money into one asset or sector that has been providing good returns. Sometimes diversifying seems like you’re giving up bigger potential opportunities. But you have to look at the big picture and where your investments will be 20, 30, or 40 years down the line.

A case in point is those who’ve invested all they have in cryptocurrencies like Bitcoin, Ethereum, and other digital assets. When crypto crashed, many people lost everything they had invested.

That’s not to say you shouldn’t invest in something like tech stocks or other stocks that may be a little riskier but offer higher returns. Just be sure to balance your portfolio by investing in more stable industries like consumer staples, health care, and grocery stores. Diversification wins all battles as a way to reduce your risk.

Buy the Dip

A bear market may offer the perfect opportunity to buy stocks you otherwise couldn’t afford. “Buying the dip” is a strategy Buffett used to grow his wealth. When you “buy the dip,” you are essentially getting stocks at a discounted price.

Here’s an example. Say you want to invest $5,000 in Google. On Sept. 13, Google shares were selling for about $107, almost 25% down from what shares cost a year ago. You’d be able to buy about 46 shares at that price. If the stock price rises to what it was a year ago, say $143 per share, you would have made about $1,570 on your investment.

However, there is a strategy for “buying the dip” successfully than helps you avoid the temptation to try and time the market. When a stock drops by 25%, it may look like a good time to scoop it up. But, in a bear market, there’s a chance the stock price could drop even further.

A strategy called ‘dollar-cost averaging’ is the best way to buy the dip in stocks. With dollar-cost averaging, you “average down” your investment as the stock price falls. So instead of using the whole $5,000 to buy shares at $107, you buy $1,000 worth of shares at that price, then another $1,000 when the stock drops to $100, then another $1,000 when the price drops to $90, and so on. This helps reduce the risk of losing money on your investment.

Bottom Line

Bears are scary apex predators, but a bear market isn’t something to be afraid of if you are proactive and make the right moves with your investments.

Sometimes the best thing to do is nothing at all and ride the market until things get bullish again. Remember, your portfolio may be down, but you really haven’t lost mone y… unless you sell.