What Is a Bear Market? Should I Worry When It Happens?
A bear market refers to the market where prices of stocks and securities keep declining for a prolonged time, often accompanied by widespread negative investor sentiment. In a bear market, most investors anticipate significant losses and they continue to sell their stocks and other investments with the hope to avoid further losses.
The general rule of thumb is that when there is a sharp decline of 20 percent or more in different market indices, such as the Standard & Poor’s 500 Index (S&P 500) and the Dow Jones Industrial Average (DJIA) for at least two months, one can say markets are in recession. Additionally, when this happens, it is unknown when prices will reach their bottom. Last time the Dow slipped into the bear territory when its stock went down more than 20 percent from its all-time high after the declaration of the coronavirus pandemic.
A bear market is often something that most investors fear. But should you be worried about it? Continue reading to know how to come out stronger from a bear market.
Should I Be Worried When We Enter a Bear Market?
There is a lot of uncertainty in a bear market. If you wait too long and stocks rise again, you might feel like you have lost an opportunity to buy stocks on a dip. And if you purchase new stocks too soon on a dip, you might continue to see a decline in their value further. So, it can be very tricky to know when to invest and when to sell.
Luckily, bear markets tend to prevail for a shorter timeline and be less statistically severe than bull markets. Bear markets are the inevitable part of market cycles, and if you know the right strategies, not only can you survive them, but you can also position yourself to benefit from them. So, even though a bear market period is not exciting, you should not lose hope or worry too much.
Crucial Tips on How to Sustain a Bear Market
Here are a few tips that can help you survive a bear market:
- Think long term instead of making knee-jerk reactions
When the period of a bear market starts, keep yourself calm and make sure that you don’t react to every movement in the market. The primary reason why an average investor underperforms in the stock market is moving in and out too quickly. Though it’s a rule of thumb to buy low and sell high, reacting emotionally or out of fear will do no good to you. So, invest in only those stocks that you want to own for a long time and avoid selling them just because their prices are getting lower in the bear market.
- Invest in companies with solid balance sheets and diversify your investments
Over a few decades, we have seen many companies go out of business in bear markets. Most of these companies are the ones that don’t have a strong cash flow or the ones that are not using their resources wisely. So, when it comes to investing, focus on only high-quality companies that demonstrate high-performing balance sheets and have competitive advantages over others.
Apart from investing in only high-quality companies, make sure to not put all your eggs in one basket. Rather, have a well-diversified portfolio to maximize your returns and minimize your losses. You can think about dividend-paying stocks and bonds. It is best to consult with an investment expert to help you find the best investment options for you.
- Follow the approach of unit-cost averaging instead of investing or selling out of fear
It can be tempting to buy a stock when you see a dip in its price. If you buy it and its stock price continues to go down 50 percent or more, you are going to lose a lot of money. On the other hand, if you try to time the market, it can cause you even more damage. So, what to do?
The best strategy is to add money to the market with a unit-cost averaging strategy. This strategy involves investing money continually over time and in roughly equal amounts. It will not cause a burden of investing a big amount when a stock is at its high while still taking advantage of market dips.
Want some expert advice and guidance to make the best investment decisions? Connect with New Age Insurance Brokers today. Our investment consultants can help you understand your risk tolerance, different investment options, how the investment market works, and more. For any queries, please call us at +97143573378 or send an email to us at email@example.com.