Investing in a Bear Market
Tommy
Well we knew that the Bull market couldn’t have lasted forever. On March 11, 2020, the stock market went into a Bear market as the DOW Jones and S&P500 decreased by more than 20% within a 2-month period. Thanks to Covid-19! We haven’t seen a Bear market since 2007-08 during the beginning of the Great Recession.
Speaking of recessions, a Bear market is not a recession. By definition, a recession is when you have two consecutive quarters of negative economic growth or GDP. The last time GDP was negative was Q1 2014.
Certain industries have been hurt by the outbreak of Covid-19 like the hospitality and restaurant industries. Could this send us into another recession? If I could predict the future, then I would be the richest person in the world… But yes, we could be heading for another recession, but I don’t think we are. Some states are planning on reopening their economies in May.
Since we have officially entered a Bear market, I wanted to share some tips on how to invest in a Bear market.
Keep Your Emotions in Check:
Everything might seem like the world is ending… But you have to take your emotions out of investing. Yeah my 401(k) lost about 17-20%. But you have to remember that Millennials are investing for the long-term so you shouldn’t be selling your investments anyways. You need to stick to the plan.
It all depends on your risk tolerance, investment goals, and how close you are to retirement. If your risk tolerance is high like mine, then I see this as a buying opportunity as stocks are drastically lower than 2 months ago. When you are far away from retirement and you want to grow your portfolio, like Millennials are, you should continue to invest because you have more time for your investments to recover from a downturn. We are investing for the long run. If your goal is wealth preservation, then you might want to rebalance your portfolio into safer investments. If you are a Baby Boomer or a person about to retire, you don’t want to lose money. So your investments should be less risky. The only exception is if you don’t have to rely on your retirement accounts for income during retirement. An example would be is if you receive a pension and social security and you can live off of that income without tapping into your retirement assets.
Diversify:
Here’s a no brainer. Spread your investments between stocks, bonds, and cash. Why does every financial advisor set up a risk tolerance profile in your first meeting? Why does every mutual fund have a prospectus? It’s because there is risk with investing and you can lose money. If you put all of your money one stock, then you risk losing it all if the company doesn’t perform. It goes back to the saying, don’t put all of your eggs in one basket. Your investment portfolio should be diverse so you don’t lose all of your money and it is basic strategy when it comes to investing. That’s why I like investing in mutual funds/ETFs as they are invested in many different companies and industry sectors.
Your investment portfolio is based on your risk tolerance. So Millennials should have 50% or more invested in stocks and the remainder in bonds or in cash because most of us won’t be retiring for 30+ years. Ex.) 50% stocks / 40% bonds / 10% cash. People who are closer to retirement should have less risky investments and have a portfolio of about 30% stocks / 30% bonds / 40% cash.
Invest in Value, Dividend Blue-Chip, and Consumer Staples Stocks:
Warren Buffet, one of the greatest investors of all time, says a Bear market is a great opportunity to buy undervalued stocks. There are numerous ways to try to pick value stocks and you have to come up with your own criteria, but the main ways are Price/Earnings ratio (P/E ratio) below 9, low Price/Book Value ratio (below 1.20), and Return on Equity Ratio (Net Income / (Assets – Liabilities).
Blue-Chip stocks are large-cap stocks that have been around for a long time and are industry leaders. Many Blue-Chip stocks distribute dividends, which are payments made to investors from a company’s earnings. Blue-Chip stocks are good investments in Bear markets because they have a long track record of success and are relatively safe investments.
Invest in consumer staples stocks. Consumer staples stocks are companies that make products that people will buy no matter what the condition of the economy is. For example, the CDC is telling everyone to wash their hands for 20+ seconds and to use hand sanitizer. So what are people going to do? They are going to buy hand soap, hand sanitizer, and apparently toilet paper! Another consumer staples stocks are utility companies like electricity. Even during an economic downturn, people still need to use electricity in their homes. Alcohol is another industry that tends to do well in economic downturns.
I see the market to continue to be volatile until Covid-19 is under control. It’s also an election year and election years usually means the stock market is volatile because of the uncertainty of the presidential election. But I will continue to invest into the stock market as this is a great buying opportunity.