There are rumblings within the investment community that the markets may be set to decline in the near future and this has newer investors a bit concerned. Everyone has heard horror stories of losing everything when the markets suddenly take a downturn and unless you’ve ever experienced a true market crash, you may be in for the ride of your life. This is not to say that the markets will crash or that we are about to enter a bear market phase. The question is, can you survive a prolonged bear market if you had to live through one? It pays to know what to expect and how to handle your finances and investments if the worst should come to pass.
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What Exactly Is a Bear Market?
It is common knowledge that a bull market is when stocks are soaring and gaining on a continual upward curve but bear markets are a little more challenging to understand. A brief definition would be that during a bear market, asset prices decline by at least 20% from recently trending highs. While no one is eager to have a portfolio of investments during a bear market, there are a few strategies that can help you survive, and maybe even profit a bit if used wisely.
Recognize Fear for What It Is
If there is one thing you should avoid at all costs it would be trading on fear alone! Never buy or sell just because stocks suddenly take a turn toward a bear market as history has shown us that there will be occasional dips where today’s bear market could suddenly soar to a bull market next week. Fear is an emotion and as you have always been advised, never buy or sell based on emotion.
Making money in the market requires calm, well thought out investment strategies and that is impossible to do if you are letting fear rule your investment strategies. In fact, it might be to your advantage to roll over and play dead at this time. Isn’t that exactly what a bear might do if suddenly confronted with danger? Many instinctively know that to charge a hunter with a loaded .375 Ruger means certain death so they choose the better option. They roll over and play dead until it is safe enough to run toward safety.
Beware of Overinvesting
When those asset prices begin to tumble you may be tempted to buy as much as you can as quickly as you can. This can be a grave error in judgment. It could be that some of those stocks would have been on the downturn even in a bull market and you could lose your proverbial shirt in the process. Having said that, on the other hand, careful market analysis should give you a fairly accurate idea of those stocks, which will very likely begin gaining value again in the short term.
Also, when you take every available dollar to buy up stocks when prices are low you are likely to take from funds otherwise needed. Many new investors beg a little here, borrow a little there and before they know it, they are late on mortgage, automobile, and credit card payments.
If you have fallen into this trap, it is good to know that there are ways to avoid penalties. For example, this guide will give you step-by-step details on how to get a late fee waived if you’ve missed a credit card payment. While it isn’t advisable to miss even a single payment, an app like Tally can help you pay down your credit card debt and grow your credit score. This is also important for a serious, albeit new, investor. The app could help you save a lot of money in fees and interest, money that could be put to better use.
Better Safe Than Sorry
One bit of advice you aren’t likely to hear often is that when it comes to making money in the market, it is better to be safe than sorry. No, this doesn’t mean you shouldn’t buy stocks you are interested in as they appear to be rising substantially, but rather to temper that with the purchase of defensive stocks that do well in literally any market. The key is knowing when to buy them. Many seasoned investors always keep a portfolio of defensive stocks purchased before a downturn so that they have stable earnings during a bear market.
Unfortunately, the term ‘defensive stocks’ is often confused with the term ‘defense stocks’, which are totally different entities. A defensive stock is one that will offer steady earnings and consistent dividends because those products are needed in any market at all times. Examples of defensive stocks might be such things as personal hygiene products, utilities, pharmaceuticals, and literally anything that is needed in good times or bad. No matter which way the market trends, these underlying assets will still be in demand. A defense stock, on the other hand, is just that. They are stocks you can buy in companies that manufacture weapons and ammunition, for example.
Key Takeaways for Survival in a Bear Market
By now, you get the point. Just because there is a rather sudden drop in asset prices of 20% or more, it doesn’t mean that you are about to enter a protracted bear market. Short dips can be managed if they are just that, short in duration. The key is to watch the markets consistently, read forecasts released by successful investors or brokers, and take enough time to analyze the current trend. It doesn’t pay to make rash trades out of fear but rather to approach investing from a position of strength.
Also, just because prices drop lower than you’ve ever seen them doesn’t mean you should sink your entire life savings or household expense money into buying up as many as you can. Here again, those stocks may have been perched on the ledge waiting to fall anyway. It is always wiser to be safe than sorry and if it means rolling over and playing dead until you see which way the wind is blowing, so be it. Just because it looks like a bear market doesn’t mean it will be a protracted one. You can survive a bear market if you are well prepared, and that is your key takeaway for today.