Investors should always expect some ups and downs in the stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition market, but sometimes the market only trends in one direction. When the market trends down over the course of several months it is called a bear marketBear market A weak market where stock prices fall and investor confidence fades. Often happens when an economy is in recession and unemployment is high, with rising prices.+ read full definition. During a bear market, prices decline by 20% or more. Bear markets can be stressful and can lead to bad investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition decisions.
Here are five things to remember when investing in a bear market:
1. Keep your emotions in check
Staying calm is vital if you want to make good decisions during a bear market. As markets fall, investors may feel the urge to sell their stocks in an attempt to prevent additional losses. This instinct to sell can be emotionally powerful and hard to resist. Selling is often a bad decision because investors may recoup their loss if the markets recovers. Experiencing a loss is only certain once you sell. Sticking to your investment plan – a strategy designed to help you reach your financial goals – will help you resist making emotionally driven decisions that could sabotage your long-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition success.
2. Know your time horizon
Your time horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition is the length of time you expect to hold an investment. The time horizon you choose and the risk of an investment are related. Because a bear market can strike at any time, it’s important to consider that risk when structuring your investment plan. A bear market could be very disruptive if you have near term goals like buying a house or are about to retire. If you are counting on your investments within the next few years, consider taking steps to lower the risk in your portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition, such as limiting your exposure to stocks in favour of investment grade (i.e. high quality) bonds to minimize the threat of a bear market. If you have a long-term investment horizonInvestment horizon How long you expect to hold onto your investment. Based on when you believe you will need your money back. In most cases, the shorter the horizon, the less risk you will want to take with your money.+ read full definition, you can likely afford to wait for markets to recover. Taking a long-term view and sticking to your financial planFinancial plan Your financial plan should cover every aspect of your finances: saving and investing, paying down debt, insurance, taxes, retirement planning and estate planning.+ read full definition can help you overcome the short-term shock of falling stock prices.
3. Be diversified
A well-diversified portfolio contains a mix of stocks, bonds, cash and other investments that behave differently in market cycles. Within the stock portion of your portfolio, try to diversify across sectors and/or geographically (for example, try to not hold only one country’s stocks). This will help mitigate risks caused by factors affecting companies within an industry. Some sectors may rebound quickly after a bear market, while others may be sensitive to negative economic conditions for an extended period of time. Holding a range of assets can help reduce your portfolio’s overall volatilityVolatility The rate at which the price of a security increases or decreases for a given set of returns. A stock price that changes quickly and by a lot is more volatile. Volatility can be measured using standard deviation and beta.+ read full definition. While a bear market can still affect your investments, diversificationDiversification A way of spreading investment risk by by choosing a mix of investments. The idea is that some investments will do well at times when others are not.+ read full definition can help dampen the effects of a market downturn.
4. Don’t try to time the market
You may have heard the phrase “buy low, sell high.” This refers to a strategy of buying investments when you think prices are too low and selling them when you think prices are too high. Using this approach requires an investor to “time the market” by selling before prices drop and buying before prices rise. It is nearly impossible to do this! For long-term investors, holding on to your investments, even during downturns, has generally been an effective strategy assuming that your financial goals and situation remains unchanged.
5. Dollar-cost averaging
Depending on your circumstances, a bear market can be a good time to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition. Dollar-cost averagingDollar-cost averaging A strategy where you try to reduce the cost of buying securities by spreading your purchases out over time. You buy a set amount of a security, such as a mutual fund, at regular intervals. In the end, you average out your cost per unit.+ read full definition is investing the same amount of money at regular intervals. For example, you may choose to invest $100 every two weeks from your pay cheque. This strategy could be useful if you’re worried about volatility during a bear market. By spreading out your investment purchases, you can avoid committing all of your money at one time. This may reduce the impact of buying an investment just before its value declines.
Learn more about investing through economic cycles and how bear markets can be healthy for your portfolio.
Watch the video, after the bear comes the bull.