Bear markets and recessions are a time of great stress and panic for people who have a significant portion of their assets in the stock market. This, of course, is understandable. No one likes to watch their balances drop.
But frightening though bear markets can be, reactive panic is always the wrong move. Markets shift, and a portfolio that’s in rough shape now can be expected to improve eventually. It’s all about making the right choices until that day comes.
In this article, we take a look at what a bear market is, and what decisions you can make to survive, and even thrive in it. Read on for some financial tips and strategies!
What Is a Bear Market?
A bear market refers to a period of time in which stock prices are dropping, inspiring many people to sell their shares. While it is often a symptom of recession, they are not quite the same thing. To be in a bear market, securities need to drop by 20% in the period of two months.
A recession, on the other hand, refers to a prolonged period of economic decline. Consequently, recessions take more time to occur, and will usually last longer than a market that is simply bearish.
Temporary or not, bear markets can be financially devastating to people who keep significant sums of money in the stock market.
Below, we take a look at how to take some of the bite out of the bear market so you can prosper and thrive.
Understand Your Risk Tolerance and Invest Accordingly
As you look to continue making investments in a bear market, it’s important to have a keen understanding of your personal risk tolerance. Warren Buffett has said that down markets are the best time to be greedy where stocks are concerned — the simple reason being that your money goes farther when prices are cheaper.
That’s swell for him. Most investors, however, don’t have billions of dollars lying around to cushion the blow of a bad investment scenario.
As is always the case where the stock market is concerned, it becomes a question of risk tolerance. How aggressive do you want to be? What are you willing to lose? What are your long-term goals?
These are questions that a financial adviser or wealth management expert will probably discuss with you in any investment scenario, but particularly in a bear market.
Generally, the idea for lay people isn’t to try and get fancy the way Warren Buffet might. Instead of investing in particular sectors, or trying to time the market, diversify, and think about the long-term.
By continuing to invest conservatively across all sectors of the economy, you increase your odds of seeing an eventual return on your money.
Age Makes a Difference
Young investors have little to fear from a bear market. In fact, a survey following the 2008 bear market revealed that investors who had less than $10,000 in their portfolio have experienced an average growth of 40%, while investors who were close to retirement age at the time lost money.
The reason, for this, of course, is quite simple. Investors who have many years ahead of them before they need to access stock-based retirement accounts can trust that time will correct temporary market dips.
In fact, they may even be advantaged by the occasional decline in stock prices — allowing them to buy more shares and trust that they will grow in value during the intervening years between the present and retirement.
Retirees or people near retirement age may find that their situation is slightly more complicated. In this scenario, there are several things you can do to ensure your financial security:
- Work on eliminating debt. The less overhead you have, the easier it will be to navigate lean financial times.
- Think about your allocation of resources. Where is your money? If you can move your assets out of stocks and into cash or bonds before the market dips, it is ideal.
- Don’t panic sell. You will only lose money by dumping your assets in a panic. It’s better, in the long run, to live lean for a while, and ride out the storm.
Remember, Stocks Are a Long-term Proposition
Warren Buffett once said that you shouldn’t buy any stock you aren’t willing to own for at least ten years. Of course, this doesn’t mean that your portfolio can’t fluctuate. It can, and should. It does, however, mean that you should always remember that the stock market is a long-term proposition.
Just because things don’t look so good right now doesn’t mean that your holdings won’t improve in the not-so-distant future.
Your situation may dictate that you have to sell some of your stocks as they dip in value thanks to the bear market. Everyone’s buying and selling habits are personal and should be tailored to their long-term goals.
However, dropping your stocks like they’re hot in a reactive panic to dipping market values is not the right way to go.
Complicated though the stock market may be, it’s guided by a principle everyone can understand: buy low, sell high. Don’t panic. Things will get better soon.
Photo Credit
Image by Gerd Altmann from Pixabay
Guest Author Bio
Sarah Daren
With a Bachelor’s in Health Science along with an MBA, Sarah Daren has a wealth of knowledge within both the health and business sectors. Her expertise in scaling and identifying ways tech can improve the lives of others has led Sarah to be a consultant for a number of startup businesses, most prominently in the wellness industry, wearable technology and health education. She implements her health knowledge into every aspect of her life with a focus on making America a healthier and safer place for future generations to come.
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