We’re all familiar with a declining stock market at this point – seeing that the most recent market drop was this year due to the COVID-19 coronavirus pandemic. Some have experienced similar events; others have never experienced a significant market drop like this in their lifetimes.

Regardless of your experience, the question still stands as one of the biggest among investors during bear markets, “How do I manage my investments when the stock market is down?”

Such an important question is difficult to answer, seeing that everyone’s financial scenario is different and unique to them. However, there are tried and tested investing tips that apply to every investor when managing their portfolio during a bear market. Here are five to make sure that you always follow.

5 Bear Market Investing Tips

For those not familiar with the terms, a bear market is when the market experiences a significant price drop for longer periods of time. By definition, a bear market is when the stock market price falls by at least 20% or more from recent highs due to an economic event. [1]

On the other hand, a bull market refers to a stock market where prices are rising or expected to rise. [2]

So how do you invest in the stock market during a bear market run? I short, you must avoid letting your emotions drive your decisions, focus on the logic, buy more when appropriate, and remember the history of the significant stock market recessions. These, among a few more listed below, are just the starting point.

1. Use Logic, Not Emotion

Hopefully, you’ve done your research on your investments before putting your money to work. Or, if you’re a passive investor and invest in exchange-traded-funds (ETFs) or mutual funds, you should be familiar with the long-term historical returns.

When making investment decisions, remember you’ve done your homework and research. Too many investors let their emotions guide their investment decisions, especially when a significant market decline has occurred.  You’ve researched the stocks or funds you invest in and know that they are well-established entities regardless of the market conditions.

Logical investing means looking at the numbers and making decisions based on the logic supporting that decision. Suppose one of your investments appears to be headed for bankruptcy because of a major economic event. In that case, as supported by your logical research – this might support a decision to sell your positions and cut your losses.

Suppose your decision is based on the fear of losing your hard-earned money forever, even though you still strongly believe in your investments. Furthermore, they are performing better than the market average during the same bear market. In this case, you might want to rethink your decision to sell your positions during a bear market.

2. The Market Is on Sale!

Keeping a logical head when making investment decisions leads me to the next tip; if your investments are sound companies and appear to be weathering the storm well, take advantage of the market prices and buy more while you can!

Think of significant shopping days, like Black Friday or Cyber Monday during the end of year holiday seasons. More money is spent on these days than any other shopping day because everyone knows that prices go on significant sales that don’t happen at any other time of year.

Think of a bear stock market as an opportunity to buy more shares in sound companies that are well established for the long term. You’ll get in at low prices, and within time the bear market will turn to a bull market, and your returns will be even more remarkable because you took advantage of great prices!

3. Consider the History of Bear Markets

Some of the more modern, famous stock market crashes include Black Monday in 1987, the 2001 dotcom bubble, the 2008 financial crisis, and today’s health crisis – the COVID-19 pandemic. [3]

The graph below is a chart of the S&P 500 stock market index, labeling the four crashes mentioned above.

(Chart data source: Yahoo Finance)

Each of these bear markets caused major upset among investors, causing the stock market to decline by at least 10% or more in a short period of time.

So, what do I mean when I say, “consider the history of bear markets?” Well, had investors kept their money invested the entire time during any one of these recession events, they would have regained any loss and continued an upward trend of a growing portfolio.

In short, 100% of all bear markets in history have recovered and continued to reach new market highs. The lesson to be learned here is to be patient, trust your logic, and know that you have a 100% chance statistically of not losing money if you wait things out until a recovery. 

How long should you wait it out? On average, stock market recessions only take four months to recover. [4] However, some have taken more, and others less.

4. Advice from Warren Buffett

Warren Buffet is considered by many to be the greatest investor of all time. In his own words, he states that investors should be “fearful when others are greedy, and greedy when others are fearful.” [5]

I couldn’t have said it better myself. Are you experiencing a bear market right now? My advice is to remember Warren Buffet’s advice.

5. The Short- And Long-Term Vision

As investors, we should expect market volatility in the short term. In fact, many investors even consider market declines to be healthy to eliminate any so-called “bubbles” of inflated prices due to investor over-optimistic sentiments. So, when your portfolio value goes down occasionally, remember this: the stock market is volatile in the short term and bullish in the long term.

What does this mean? It means you should expect prices to fluctuate up and down in the short term (usually anything less than 12 months) and have an upward trend for the long term.

Investors, Remember This…

If you’ve lost money in a bear market previously, take note and learn from past mistakes. So, the next time you experience a bear market, remember that:

  • You should always use logic, not emotions when making investment decisions
  • During bear markets, take the opportunity to find great investments that are “on sale!”
  • Confide in the history of the stock market because bear markets have recovered 100% of the time.
  • Remember the advice of Warren Buffett: And that is to be ”fearful when others are greedy, and greedy when others are fearful.”
  • The stock market is volatile in the short term and bullish in the long term

If you keep these investing tips in mind during any bearish stock market, and you’ll be well on your way to a more successful investment portfolio.

Footnotes

[1] Chen, J. (2020, October 6). Bear Market Definition. Investopedia. https://www.investopedia.com/terms/b/bearmarket.asp#:~:text=A%20bear%20market%20is%20when,pessimism%20and%20negative%20investor%20sentiment.

[2]  Chen, J. (2020, February 8). Bull Market Definition. Investopedia. https://www.investopedia.com/terms/b/bullmarket.asp

[3] Chen, J. (2020, May 4). Stock Market Crash Definition. Investopedia. https://www.investopedia.com/terms/s/stock-market-crash.asp#:~:text=Famous%20stock%20market%20crashes%20include,the%202020%20COVID%2D19%20pandemic.

[4] Franck, T. (2020, February 7). Here’s how long stock market corrections last and how bad they can get. CNBC. https://www.cnbc.com/2020/02/27/heres-how-long-stock-market-corrections-last-and-how-bad-they-can-get.html

[5]  Brownlee, A. (2020, June 8). Warren Buffett: Be Fearful When Others Are Greedy. Investopedia. https://www.investopedia.com/articles/investing/012116/warren-buffett-be-fearful-when-others-are-greedy.asp#:~:text=Warren%20Buffett%20once%20said%20that,over%2C%20and%20one%20should%20be