Notes

Taking advantage of bear markets

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Markets in bear mode: When investment prices drop by 20% or more

Generally, a bear market occurs when a broad market index falls by 20% or more from its peak over an extended period of time. An entire market, like the Dow Jones Industrial Average, and individual stocks can experience bear markets. On June 13, 2022, the S&P 500 fell into bear market territory. The stock is down more than 21% for the year.

The 20% threshold is often merely a guideline; bear markets sometimes plunge much deeper than that over a sustained period of time, not all at once. There are occasional relief rallies in the market, but the overall trend is downwards. As investors begin to find stocks for sale at attractive prices, the bear market officially ends.

There is latest bitcoin news and low confidence on the part of investors during bear markets. Investors often ignore any good news during bear markets and continue to sell quickly, resulting in even lower prices.

Despite a bearish sentiment on one stock, the market as a whole might not be affected. However, when the market turns bearish, nearly all stocks within it fall, even if they are reporting good news and growing earnings.

A bear market lasts how long and why does it happen?

Sometimes, but not always, bear markets occur before or after recessions.

Investing analysts carefully monitor key economic indicators such as hiring, wage growth, inflation, and interest rates for signs of slowing economic growth.

A shrinking economy indicates to investors that corporate profits will decrease in the near future. They sell stocks, lowering the market. Bear markets can lead to higher unemployment and harder economic times.

The average time frame for bear markets is 363 days versus 1742 days for bull markets. Statistically, they are less severe, with average losses of 33% compared to bull market gains of 159%.

In the wake of the Coronavirus bear market that began on March 11, 2020, the market transitioned into a bull market just two weeks later, but the full economic impact has yet to be assessed.

When the market is down, here's how to invest

A dollar-cost average can help you save money

If a stock in your portfolio slumps 25% from $100 a share to $75 a share, it will affect your portfolio negatively. If you have money to invest and want to buy more of this stock, it might be tempting to try to buy when its price appears to have dropped.

You probably won't be right, though. There is a possibility that the stock has not reached its bottom at $75; rather, it could fall by 50% or more from where it was at the high. It is risky to try to pick the bottom of the market, or time it right.

2. Diversify your holdings

Aside from picking up stocks at lower prices, diversifying your portfolio so it includes a mix of different assets is another valuable strategy, whatever the market condition is.

In bear markets, stocks that make up an index, such as the S&P 500, tend to decline together but not necessarily by the same amount. The key to a successful portfolio is a well-diversified one. Your portfolio's overall losses are minimized if you invest in a mix of relative winners and losers.

I wish you could predict winners and losers in advance. Since bear markets coincide with or precede recessions, investors often favor assets that will deliver a more steady return regardless of what happens in the economy. Adding the following assets to your portfolio could help you implement this defensive strategy:

Dividend-paying stocks. In spite of falling stock prices, many investors still desire dividend payouts. A company that pays higher-than-average dividends will appeal to investors during a bear market, as a result. (Interested in dividends? Here is a list of 25 dividend stocks that pay high dividends.)

Bonds. During shaky periods in the stock market, bonds are also a good investment since their prices often move in the opposite direction. An additional high-quality, short-term bond in your portfolio may ease the pain of bear markets, but bonds are essential to any portfolio.

In recessions, invest in sectors that perform well

In a downturn, look for sectors that tend to do well in your portfolio. Consumer staples and utilities usually do better in bear markets.

By investing in index funds and exchange-traded funds, which track a market benchmark, you can gain exposure to a variety of sectors. Consumer staples ETFs, for example, give you exposure to companies in that industry, which tends to be more stable during recessions. By holding shares in multiple companies, an index fund or ETF offers greater diversification than investing in a single stock.

4. Focus on the long-term

A bear market tests the resolve of every investor. You probably won't have to wait too long before the market recovers during these periods. When investing for retirement, bear markets are soon overshadowed by bull markets. If you need money for short-term goals, generally those you hope to achieve in five years or less, you shouldn't invest it in stocks.
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