Originally posted: November 20, 2018. Last updated: April 18, 2021

What makes a “Bear Market?”

Bear Markets are defined by when the indexes drop 20% from their highs with a consistent downward trend. Day-after-day, the indexes head lower with almost every stock seeing losses with no signs of stopping.

For long-term investors, Bear Markets can feel like putting money to work results in instant losses. Even waiting for a day when stock prices are going up to indicate trend reversals can fail as stocks retreat from lower highs only to make new lower lows the next day.

“A ship in the harbor is safe, but that’s not what ships were built for.”

Few things in life provide the security of having cold, hard cash in your account. However, while having a ship (cash) in the harbor (or bank account) is certainly safe, that’s not what it was built for – in other words, having cash on-hand is great, but it’s not earning you anything unless you put it to work.

Staying all-cash to avoid losses is a fair strategy, but, for long-term investors, it’s important to remember that time is your edge. If you don’t put your money to work, you may miss the turnaround when it finally does happen.

When investing, remembering that predicting the bottom or the top of a market move is virtually impossible even for sage investors will make buying easier if the price drops immediately after a buy.

Looking for ways for your cash to earn returns while you wait for a buying opportunity? Click here to learn about some virtually risk-free options.

How can you protect your capital while avoiding FOMO when the trend truly reverses? Below are some strategies for investing in Bear Markets.

Strategy 1 – Adjust Your Targets

Buying in Stages is key to establishing long-term investments that offer good returns over time. By not buying all-at-once, investors can build positions with lower per-share costs as a stock drops in price while still having some exposure to the stocks they want should the stock reverse direction and increase in price.

When in Bear Markets, consider adjusting your stage targets. If you typically follow a 5-10-15 strategy in Bull Markets – buying ¼ positions at the current price and then ¼ at each level of down 5%, 10% and 15% – consider increasing the drop amount to accommodate for the drop you’re observing in the current Bear Market.

In other words, adjust your levels to buy ¼ positions at 10%, 20% and 30%. Alternatively, you could also divide your buys into smaller quantities, buying 1/8 positions at 5%, 10%, 15%, 20%, 25%, 30%, and 35% down instead of ¼ positions.

Such large target ranges may feel like you’ll never get a full position in the stock you’re eyeing. However, not filling all your buy orders is a high-quality problem! Not getting an entire position means the stock price hit its bottom before you were entirely filled and is now heading to higher levels. The capital that went unused with this position can be put to work in a different investment idea.

Strategy 2 – Stay Diversified

Diversification is the strategy of not owning too much of any one stock or sector. A diversified investment portfolio can protect the investor from sudden downtrends in a specific sector, or downtrends that are magnified in one sector more than another, such as what typically happens to growth stocks during Bear Markets.

A diversified portfolio will have a minimum of five stocks in five different sectors. Sectors include Consumer Products, Energy, Industrials, Oil, Retail, Technology, and many, many more. You can use free online financial websites like Google Finance or Yahoo Finance to help learn more about sectors and research companies you might like to invest in.

Strategy 3 – The Dividend can be Your Friend

In addition to Buying in Stages, stocks with dividends can help take the edge off during days where all you can see is red. Dividend-paying companies return some of the money they earn to investors throughout the year. A Bear Market will still likely overwhelm the restoring power of any dividend, but the periodic bump may just enough to keep your head in the game.

The prudent investor will enroll in their broker’s Dividend Reinvestment Programs (called DRiPS). Rather than paying the dividend in cash, your broker will give you the fractional share equivalent instead, allowing you to compound your earnings over time as those additional fractional shares also earn dividends quarter-after-quarter and year-after-year.

It is absolutely imperative to remember NOT to buy stocks SOLELY for their dividend. Consumer product plays such as Kimberly Clark (KMB) and Procter & Gamble (PG) yield good dividends (currently, 3.59% and 3.09% respectively), however their growth prospects over time won’t provide great returns.

Real Estate Investment Trusts (REITs) and many financial investment firms can provide extremely high dividends in excess of 5%, however these are often not good long-term investments. For professional investors like Jim Cramer, stocks with exceptionally high dividends (especially more than 10%) are typically bad investments with those dividends often being “red flags.” Most companies can’t maintain high dividend payouts and will cut the dividend altogether before dropping significantly in value, sometimes going out of business.

How do you pick a good dividend-yielding investment?

Research companies in sectors where you want to invest. Then, find good-quality companies in those sectors who also happen to pay dividends, too. This may feel like the impossible errand like trying to find a diamond in the rough, but you might be surprised at the high-growth companies who pay dividends.

Here are a few examples of quality long-term performing companies who also have good dividends from Get Irked’s portfolios (listed alphabetically):

  • Apple (AAPL), the renowned phone and computer manufacturer expanding into services, pays out $3.08 per share annually.
  • Boeing (BA), the airplane manufacturer, pays out $8.22 per share annually.
  • Citigroup (C), the investment bank with international exposure, pays out $1.80 per share annually.
  • Dow (DOW), the what’s-old-is-new-again chemical purveyor spun out from DowDupont, pays out $2.80 per share annually.
  • Disney (DIS), the media mega-conglomerate with upcoming Disney Plus streaming, pays out $1.76 per share annually. 
  • JP Morgan Chase (JPM), the Best in Breed investment bank and credit card provider, pays out $3.20 per share annually.
  • Logitech (LOGI), the computer and video game hardware manufacturer and our #1 play for the video game space, pays $0.69 per share annually.
  • Nike (NKE), the high-growth shoe and athletic attire manufacturer, pays out $0.88 per share annually.
  • Xilinx (XLNX), the Best in Breed play on the 5G mobile technology rollout, pays out $1.48 per share annually.

As always, not all investments are suitable for all investors. Consider consulting with a professional investment adviser to ensure your strategies and ideas fit your long-term goals. Any investment may lose value over time, and you need to remember you’re investing at your own risk, so you need to know the risk you’re taking on.

Strategy 4 – Distance Makes the Heart Grow Fonder

Buying in Stages and dividends still cannot protect the investor from the biggest danger – their own mind. It can feel overwhelming to look at a sea of red in your portfolios day-after-day.

If you feel yourself taking on emotional trauma during Bear Markets, use Good Till Cancelled (GTC) limit-orders to enter your strategy in advance, and then consider giving yourself a break by not looking at your portfolio’s performance as often.

Remember – if you’re investing for the long-term, the day-to-day market action isn’t as important as what takes place over weeks, months, years or even decades. Short-term drops in stock value feel a lot more painful if you’re looking at them every day.

If you know you’re going to need funds in the short-term, it’s certainly okay to sell some of your positions, but try not to sell into panicked down days. As many wise investors will tell you, “No one ever made a dime panicking.” Historically, extreme down days are often followed by a bounce to the upside. You will find your portfolio will perform better in the long-term if you sell on “green days” not “red days.”

Establish your plan and strategies in advance, lock them in place, and re-evaluate on a weekly, bi-weekly, or even monthly basis. If you select solid long-term investments and pay attention to company- or sector-specific bad news events to indicate a time to bail out on that investment (consider using Google Alerts to email you when a news event happens for each of your companies), you will be able to invest responsibly, even during Bear Markets.

Strategy 5 – Don’t Go It Alone

Finally, remember you’re not the only one out there investing for the long-term. Find friends who invest or seek out communities like Get Irked where you can get good investment ideas and strategies, or, at the very least, commiserate with others during red days.

As the adage goes – misery loves company.

Do you have questions or feedback? Leave us a note in the comments!