Your investments versus a bear market: how to get on top?

When the market drops as much as it did in the early part of 2022, investing can be incredibly scary. It almost feels like you’re throwing good money after bad because every time you make a deposit, you see a lot of it seem to evaporate before your very eyes.

And as you watch your account balances shrink, it’s almost as if your future goals are slipping away before your very eyes, too. Yes, if you look at your investments versus a bear market, it can be ugly. Still, there is a reasonable strategy you can use to come out on top.

Frustrated investor with head in hand, next to a huge graph with a descending line and the shadow of a bear.

Image source: Getty Images.

First: getting your financial house in order

Bear markets often result in job losses. Even if you keep your job, life happens, and unexpected costs can crop up at a time when you run out of supplies. That’s why it’s important to have an emergency fund in an FDIC-insured account just in case. No, you won’t make a huge return on that money, but you have an extremely high chance that the money will be there when you need it. That can dramatically reduce your risk of being forced to sell your stocks when they’re in a bear market.

In addition to the emergency fund, getting your debts under control is critical. It may be okay to invest if you have debt, but that debt should really have three main characteristics:

  • It must have a low interest rate. There is no point in borrowing money at a higher rate than you can reasonably expect to earn from your investments over time. Even if it’s close, paying off your debt has a guaranteed return, while the stock market’s returns are never guaranteed.
  • It should have a payment that you can afford without ruining your lifestyle. Investing in a healthy market is hard enough, but when the bear comes growling, the stress of a hefty payment makes it even harder to make smart decisions.
  • It should play a key role in your future. If your debt offers you something very important — such as a place to live, the ability to earn a living, or something you need to stay in your life — the benefits may be worth the risk versus the cost of it. keep the loan. debt.

Next: Recognize what stocks really are

When all is said and done, a share of stock is nothing more than a partial ownership stake in a company. That stock gets its value based on the company’s performance and prospects over time.

If the stock price falls during a bear market, ask yourself why it is falling. It could be because the company’s future has soured or because the market is just scared. If the company’s prospects still look good, but the stock price is weak, you may have a legitimate bargain on your hands. Using a valuation technique like the discounted cash flow model to find those bargains can help you outperform.

In that case, a bear market could be a good time to pick up more shares of a great company at a low price. That shift in perspective to focus on the company rather than the stock can go a long way toward calming your nerves and making smarter long-term decisions.

Finally: realize that no one gets it right every time

While investing can be a great way to build wealth over time, no investor gets it perfect, not even Warren Buffett. You will make mistakes. Moreover, even if your process is good, sometimes the prospects of companies will suddenly sour.

That is why it is important to have a diversified approach to your investments. Diversification will not prevent bad things from happening to your portfolio. What it can do is lessen the impact stumbling a single company has on your overall portfolio. That’s an important part of staying invested during a bear market and giving yourself the best chance of appearing in a better spot on the other side of the market.

Mix it together with a long-term focus to beat the bear

When you combine a solid personal financial foundation with a value-based investment approach and a healthy respect for diversification, you have a powerful toolkit for beating a bear market. Keep in mind that it will probably take some time for the market to come to its senses, so have the patience to let your stock do their thing.

In the long run, a company’s market price should respond to its fundamental business strength, not just market sentiment. With the patience to let that process go, you can eventually leave that bear market behind.

By making today when you put these pieces together, you have a great toolkit ready to get on top of a bear market. The sooner you start, the sooner you can actually fight back. So start harnessing the power of your inner bear hunter now.

Chuck Saletta has no position in any of the listed stocks. The Motley Fool has no position in any of the listed stocks. The Motley Fool has a disclosure policy.

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