Staying the Course: How to Survive a Bear Market

A bear market is defined as a decline of 20 percent or more from previous highs in a major stock market index. Benzinga/Shutterstock

The financial markets go up and down. But sometimes, they really go down and cross into what is known as bear market territory.

A bear market is defined as a decline of 20 percent or more from previous highs in a major stock market index such as the S&P 500, Dow Jones Industrial Average, or Nasdaq Composite. Because this raises negative sentiment among investors who expect further losses, bear markets are often sustained and associated with panic selling.

But panicking is the worst thing you could do in a bear market. There are ways to shield your portfolio during these downturns. So let’s explore a few.

Remember, It’s Only Temporary

Bear markets are normal segments of market cycles, and the market always tends to recover. In fact, many bear markets have historically lasted only a few months.

The average bear market lasts 9.6 months, according to an analysis by Ned Davis Research. This shouldn’t have a significant overall impact on your long-term investing strategy. And bear markets are often followed by bull markets—when stocks are up significantly.

So selling off your stocks means you'll lock in losses and won’t benefit from gains when the market recovers. Instead, you may want to stay invested and seek opportunities during a bear market.

Stay the Course

You may want to keep investing in quality companies you believe in. Seek those with strong balance sheets, low debt, and a history of strong earnings. Even if their shares have dropped slightly, these companies could have the capacity to recover and come back roaring. And in such a case, you’d be buying these stocks at a premium.

You could also explore sectors that historically have remained resilient during bear markets. These include consumer staples, utilities, and health care. You could invest in index funds or exchange-traded funds (ETFs) that track these specific industries. Index funds and ETFs are professionally managed and hold various stocks from different companies. They offer instant diversification.

In addition, you can turn to a robo-adviser. These are digital platforms that build and manage a portfolio based on your specific investing goals and time horizon. Robo-adviser portfolios are often built with low-fee ETFs and index funds.

Overall, it’s important to maintain a diversified portfolio. In a bear market, winning investments could help you ease the hit of the ones that went down.

Consider Dollar-Cost Averaging

Dollar-cost averaging involves investing a fixed amount of money at regular intervals regardless of market conditions.

Suppose you invest $600 into a low-fee ETF. During a bear market, your money buys more shares because prices are down. And when prices are up, it’ll purchase fewer shares. This means your average cost per share could be lower than had you invested a lump sum all at once.

Rebalance Your Portfolio

During a bull market, your stocks may have plummeted as your bonds have grown. This throws your intended asset allocation out of balance and increases risk. To regain balance, you may need to sell some stocks and use the proceeds to purchase more bonds.

Keep Saving for Retirement

During a bear market, it may be tempting to empty your retirement nest egg. But this can come with major risks. Withdrawing money from a 401(k) or IRA before reaching age 59 1/2 triggers income taxes and a 10 percent tax penalty. Plus, your nest egg won’t benefit from compound interest when the market recovers.

You may also be moved to stop investing in your retirement portfolio. But remember, the markets recover, and what drives saving for retirement is a sound long-term approach.

Plus, bull markets typically last longer than bear markets. The average length of a bull market is 2.6 years, according to Ned Davis Research.

The Bottom Line

A bear market can put you in panic mode. It’s stressful to see your investments take a nosedive. But remember why you started investing in the first place. And remember that bear markets don’t last forever. They are often preceded by bull markets, which typically last longer. So, panic selling could lock in losses and prevent you from enjoying the next boom.

Instead, take a strategic approach. Maintain a well-balanced and diversified portfolio. Consider investments such as bonds, dividend-paying stocks, safe sector stocks, and robo-advisers. Overall, stay the course.

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