9 bear market investing strategies for a market downturn

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In a Nutshell

Stock prices usually fall dramatically during a bear market, but there are some strategies to consider to help hedge potential losses. Some options to consider: maintaining a buy-and-hold stock approach, using dollar cost averaging and investing in defensive industries.
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Bear markets can be frightening for old and new investors alike. In these markets, securities typically fall at least 20% in value and widespread pessimism can abound.

For the savvy investor, bear markets are something to be prepared to weather. Here are nine bear market investing strategies that can help investors stay the course during a market downturn.

  1. Wait it out
  2. Hedge your bets with dollar cost averaging
  3. Diversify your funds
  4. Invest in defensive industries
  5. Look for bargains
  6. Buy dividend stocks
  7. Use short strategies  
  8. Bet on the “lipstick effect”
  9. Go for the gold

1. Wait it out

When stocks begin to plummet during a bear market, you may be tempted to try and cut losses by selling. But for long-term investors, it’s usually best to buy and hold stocks as usual, even during economic downturns.

In fact, data from Crestmont Research shows that S&P 500 returns over any 20-year period from 1919 to 2022 were positive. This means that, on average, anyone who invested in an S&P 500 index fund at any point between 1900 and 2000 made money, as long as they held for at least 20 years.

Remember that bear markets don’t last forever. On average, bear markets lose 35% over 9.6 months, and there have been 27 bear markets in the S&P 500 since 1928, according to a 2023 analysis by Ned Davis Research.

By contrast, bull markets gain 111% on average over 2.7 years, and there have been 28 bull markets since 1928.   

Number of events since 1928Average lengthAverage return
Bear market279.6 months-35%
Bull market282.7 years111%

Another benefit of buying and holding is that long-term investments get taxed at a lower rate than short-term investments, so you may end up paying less capital gains tax when you sell.

In short: Bear markets don’t last forever, and waiting them out is often a wise investment strategy.

2. Hedge your bets with dollar cost averaging

Since the stock market has historically bounced back, bear markets may be good opportunities for long-term investors to buy during the dip. But when exactly should you buy?

Let’s say one stock drops from $100 per share to $70 per share. It may seem like a good time to buy, but that stock could continue to drop until it bottoms out at $50 per share.

Trying to time the market isn’t typically the best investment strategy. Instead, you may want to try hedging your bets with dollar cost averaging. This method recommends that you invest equal amounts of money into your preferred stocks at regular intervals.

what-is-dollar-cost-averagingImage: what-is-dollar-cost-averaging

By buying repeatedly at different times and prices, you could effectively average out your buy-in price. This could help you avoid buying too high so you can take advantage of a dropping market.

3. Diversify your funds

Diversifying your portfolio is typically a good idea, whether it’s a bear or bull market. If you’ve ever heard the saying, “Don’t put all your eggs in one basket,” you’ll understand the purpose of diversification.

By diversifying your portfolio, you may increase the chances that some of your investments will rise or remain steady as others fall. This may help you hedge your losses overall.

One way to diversify your portfolio is by investing in a mix of stocks, bonds and cash.  

  • Stocks — Stocks tend to provide the highest rates of return in investment portfolios. However, market volatility means stocks may also be riskier than other investment options. 
  • Bonds Bonds typically provide lower rates of returns than stocks on average but are usually less volatile and safer. Investing in bonds may help hedge your portfolio against the ups and downs of the stock market.
  • Cash This can include savings deposits, certificates of deposit and money market accounts. Overall, cash investments are the safest but usually offer the lowest returns.

4. Invest in defensive industries

Defensive industries are ones that people tend to use, even in hard times. Think of necessities like shampoo, groceries, health care or energy. By investing in these more recession-resistant industries, you may be able to add a stabilizing branch to your portfolio.

You can invest in individual stocks in defensive industries, or you can invest in mutual funds or exchange-traded funds. These funds hold shares in multiple companies, helping diversify your portfolio.

For example, you can invest in a consumer staples fund to receive dividends from companies that produce essential products.

5. Look for bargains

Bear markets may even cause blue chip stocks to take a dip. Smart investors may see bear markets as an opportunity instead of a setback. Where there’s a downturn, there may also be a better chance of finding a bargain.

Famed investor Warren Buffet has said he buys during bear markets for this very reason. In fact, he once called the 2007–2008 bear market an “ideal period for investors.” Buffet knows that down markets often create fear, which can lead to stock sell-offs at value prices.

This fear may come exclusively from the market being down. In other words, solid companies get sold at lower prices — not because there’s the fear they won’t perform well in the future, but just because there’s fear in general.

When the market bounces back — like it always has historically — investors may see their bargain purchases of no-brainer companies pay off as usual.

6. Buy dividend stocks

Another way to hedge against bear markets is to invest in stocks that pay dividends over those that do not. Dividend-paying stocks usually outperform non-dividend-paying stocks — typically with less risk, according to 2022 research from Johnson Asset Management.

Stocks that issue dividends are usually profitable enough to afford it.

7. Use short strategies

Falling market prices may provide unique opportunities to make gains in the short term. While not as safe as long-term investing strategies, these short-term strategies can be attractive options to people willing to take the risk.

  • Put options Put options give holders the right to sell a stock or commodity at a predetermined price, called the strike price, for a certain period of time. They tend to increase in value when the underlying asset decreases in value.
  • Inverse exchange-traded funds Inverse ETFs seek to have an inverse relationship with major index funds like Nasdaq. The hope is that when major index funds go down, these ETFs go up. This may help investors hedge against market downturns. 
  • Short selling Investors who expect a stock to fall in value may try short selling. This typically involves borrowing stock shares, selling them at the current market price and hoping to buy the shares back at a lower price when it’s time to return them, pocketing the difference. 
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8. Bet on the “lipstick effect”

The lipstick effect theorizes that in times of economic downturn, small luxury items like lipstick will increase in sales. The idea is that while people may be unable to afford larger luxury items, small items can improve spirits.

While not a surefire bet, investors who have some extra cash may benefit from looking at cosmetic, beauty, skincare or fragrance brands.

9. Go for the gold

Gold can be a strong long-term investing strategy — sometimes performing as well as stocks. This makes it a potential hedge against hard times, and a viable option for long-term investment goals like retirement. Investors who’d like to invest in gold have a few options.

  • Purchase bullion
  • Invest in gold-backed ETFs
  • Invest in gold-mining stocks

Selling gold can be a quick way to raise cash. You may then reinvest this cash into other investments to further prepare your portfolio for a bear market.

Bear market investing FAQs

What is the best strategy in a bear market?

A potential strategy in a bear market (or any market) is to buy and hold stocks from major index funds like the S&P 500. Data from Crestmont Research shows that S&P 500 returns in any 20-year period from 1919 to 2022 were positive.

What investments do well in a bear market?

Several investment options have proven track records in bear markets.
Value stocks: Despite popular advice, value stocks tend to outperform growth stocks, even during an economic downturn. 
Dividend stocks: Dividend stocks tend to outperform non-dividend stocks, and may have less risk.  
Defensive industry stocks: Defensive industries are basic necessities, such as personal care items like shampoo or health care. The idea behind investing in these industries is that consumers aren’t likely to stop purchasing necessities, even in tough times.

How do you profit from a bear market?

There are a few ways you can try to profit from a bear market.
Dollar cost averaging: This strategy takes advantage of falling prices by investing equal amounts at regular intervals. This seeks to reduce your average buy-in amount.
Bargain hunting: Even blue chip stocks may take a hit in bear markets. Consider scooping up these bargains to potentially reap the rewards when the market bounces back.
Short strategies: Short selling, put options or inverse exchange-traded funds are all ways to try and make money in the short term during a bear market.

How do you hedge against a bear market?

A potential way to hedge against a bear market is to diversify your portfolio. While stocks generally fall during a bear market, they don’t necessarily all fall. Having a diversified portfolio can increase your chances of having some winners to counterbalance the effects of losing stocks.

You may also hedge against a bear market by investing early on in value stocks, dividend stocks and defensive industry stocks. These stocks have proven track records of performing well during bear markets.