8 Areas of Focus When Investing in a Down Market

A bear market—or down market—is defined as asset prices declining by at least 20% over two months or more (as opposed to a bull market, in which prices rise by at least 20%). Bear markets occur during periods of anticipated economic weakness when investors are feeling less than optimistic about the state of the market.

Bear markets can cause a lot of understandable anxiety for investors. But consider this: bear markets are simply part of the natural life cycle of the economy, and history has shown that these markets are relatively short-lived, lasting less than one year on average.

So, what should you do as an investor during a bear market? Below, we explore tried-and-true methods for weathering an economic downturn and discuss options to consider based on your personal finances, investment habits, and appetite for risk.

Top Takeaways

Bear markets occur when stock prices fall by at least 20% for a sustained period.
Bear markets are cyclical and part of the overall investment landscape.
Strategies like dollar-cost averaging, diversifying, and tax-loss harvesting may offer ways to continue investing during a bear market.
Instead of trying to time the market, many experts recommend focusing on longer time horizons to help investors withstand market volatility.
The most important thing you can do during a down market is not panic. Do not sell stocks on weakness unless you really need the money. While it can be difficult to watch the value of your portfolio go down, you have only truly lost money when you sell. If you are patient and hang on, odds are high that your portfolio may recover.

Is it a Good Idea to Invest During a Bear Market?

Contrary to what may seem intuitive, can be a smart financial move—if you do it wisely. The most common piece of advice you are likely to encounter during such a market is not to let fear cloud your judgment. Of course, this is easier said than done. investors who panic during a down market often make rash decisions that lead to costly mistakes, such as unloading poorly performing stocks and locking in losses. To avoid taking actions that might undermine your long-term investing goals, it is essential to make careful, well-informed choices about your investment plan while keeping a cool head. If you cannot keep a cool head, you should at least be aware of your emotions and do your best to counteract them before taking actions that will feel better in the moment (i.e., selling in an attempt to avoid further losses) but actually hurt you over the long-term.

8 Things to Focus on During a Down Market

Bear markets can offer many opportunities for the savvy investor. Here are eight tips for surviving and thriving during an economic downturn.

1. Explore the power of dollar-cost averaging

With dollar-cost averaging, you invest a fixed dollar amount at regular intervals, regardless of the share price or current state of the market. This “slow and steady wins the race” approach to investing allows you to smooth out the ups and downs of an individual stock’s average purchase price, buying more shares at lower prices (essentially on sale) and fewer when prices are higher. Dollar-cost averaging removes the stress of making investment decisions during a volatile market and helps investors avoid common bear-market pitfalls such as panic-selling stocks.

2. Forget about timing the market

An investing aphorism says the best way to capitalize on stock-market gains is “time in the market,” rather than “timing the market.” Experts agree that it is nearly impossible to predict short-term market movements. In fact, we suggest you view people who profess an ability to time with a healthy degree of skepticism. If you try to predict the best times to buy and sell, moreover, you run the risk of missing the market’s best days. If you feel the need to alter your investment plan during a down market, making gradual adjustments may be a better way to do so.

3. Rebalance your portfolio

One way you can make gradual adjustments during a down market is to rebalance your portfolio. When you invest in the stock market, you choose your asset allocations based on your individual risk tolerance. But when there is market volatility, your investments can be thrown out of whack—and, left unchecked, this can lead to declining value in your portfolio. Rebalancing your portfolio simply means periodically buying more of some holdings and paring back on others to ensure you are staying on track with your long-term financial plan. It also takes the emotion out of your decision-making so you can instead depend on proven behaviors that lead to more reliable results.

4. Diversify

Another strategy that can help investors weather a bear market is diversification. Much like rebalancing, a well-diversified portfolio can help prevent investors from experiencing extreme losses in any particular asset class or individual security. Diversifying is also akin to rebalancing in that it involves implementing a long-term, stay-the-course strategy for your investments.

Though every investor is different, there are two types of assets to consider adding to your portfolio when you diversify in a bear market:

Short-term debt. Historically (but excluding years like 2022), short-term securities such as U.S. Treasuries or government bonds have an inverse relationship to the stock market—when stock prices begin to fall, these assets typically rise in value are a great option for many investors to own during bear markets for a few reasons. First, they pay a fixed rate of return via interest payments. Second, when the bond matures, the investor gets back the entire amount of the principal. Plus, proactive investors who buy bonds before bear markets can benefit from rising bond prices during periods of market weakness. And don’t forget that diversification is important in all market environments.
Dividend-paying stocks. Dividends are typically paid to shareholders on a quarterly basis, which means they create a reliable stream of passive income for investors that can offset share price depreciation. Plus, many dividend-paying stocks exist in “defensive” sectors, such as utilities or consumer goods, that experience reduced volatility in down markets. A variation of the familiar cash payout is a stock dividend: instead of cash, some companies pay investors in the form of additional company shares. Stock dividends are expressed as a percentage of the stock’s current price. We tend to favor cash dividends over stock dividends because stock dividends are share-price agnostic, giving the investor no choice in the price they “pay” for the shares.

5. Consider tax-loss harvesting

Tax-loss harvesting entails selling securities at a loss in order to lower your taxable income for the year. When you sell securities at a profit, you are required to pay capital gains taxes. However, when you sell assets at a loss, you can use your investment losses to lower your taxes on capital gains and possibly reduce your ordinary taxable income by up to $3,000 in the current year.

Tax-loss harvesting can be a great way to help soften the blow of market losses during a bear market. Importantly, when you sell at a loss, it is essential to reinvest the sale proceeds to keep your overall exposure to stocks the same—otherwise, you may miss out on the eventual market rebound. Also, note that tax-loss harvesting works best for long-term investors who can compound their savings over time. Tax-loss harvesting only applies to accounts that are subject to capital gains, such as brokerage accounts. Accounts like 401(k)s and IRAs, i.e., tax-deferred accounts, are not eligible. It is also important to remember you cannot repurchase the same stock within 30 days of the sale for tax reasons. Doing so negates the tax benefits of the sale. This is known as the “wash sale rule.”

6. Invest in money market funds and cash accounts

Money market funds are fixed-income mutual funds that invest in debt securities (e.g., Treasury bills, federal agency notes) with short maturities and high liquidity. Because they aren’t tied to the stock market, they present less risk. They are also a great place to park your cash and earn interest without worrying about market fluctuations. With these types of funds, you have the option to pull the money out at any time and to reinvest it when the market becomes more stable.

Cash accounts, such as high-yield savings accounts, are another place where you can keep your money and earn interest until the market stabilizes.

It can be helpful to keep some money in cash and/or money markets as a source of liquidity during market weakness to avoid needing to sell stocks that are declining in value. It can also be helpful to have some cash set aside to buy more stocks on weakness in order to benefit even more upon a market recovery.

7. Stay focused on your long-term goals

We have covered some top strategies for investing during a bear market, but it is important to note that these strategies only apply if they align with your financial outlook and long-term goals. For example, if you have a nest egg that is earmarked for emergencies or future plans (such as college or a wedding), it may be unwise to invest that money during a bear market. Experts generally recommend always having at least three to six months’ worth of savings built up. If you work in an economically sensitive industry, or if your risk tolerance is low, it may make sense to keep an even larger amount of savings. In that vein, if you are carrying a lot of high-interest debt, it is almost always a good idea to pay this off first.

8. Partner with a trusted professional

When it comes to navigating a bear market, you do not have to go it alone. A professional, such as a financial adviser, can help you better navigate your options when the market gets tough. The right partner can help you review your investment strategy, provide advice and insights to help you limit your exposure to losses, and work with you to make adjustments to your portfolio while ensuring you keep sight of your long-term goals. Make sure the adviser you choose helps you stay true to your big-picture plan and objectives.

Unsure where to start? A Howland Capital investment adviser can help. Howland Capital offers customizable portfolio solutions that align with your goals and you maintain a strong investment strategy no matter what is happening in the market.

The Bottom Line

Remember: The average bear market lasts less than a year. If you employ such proven strategies as dollar-cost averaging, diversification, portfolio rebalancing, and tax-loss harvesting—and, above all, if you stay the course with your long-term goals—you will be well-positioned to weather the storm.