3 Ways to Cope with Investing in A Bear Market

There have been speculations about when the next stock market crash will be. With astute investors like Carl Icahn predicting that the crash can happen anytime this year, more experienced investors may begin to prepare for a shorting position. For people new to investing, shorting can be intimidating. Here are some ways you can cope with the bear market that follows a stock market crash.

(1) Stay Calm

Don’t panic, that’s the last thing you should do. In this case, short-term volatility happens because of more selling than buying in the market. This is usually a response to unfavourable news of a particular company, and investors react emotionally by getting rid of their stocks.

Read Also: Why You Should Not Panic When You Lose Money In The Stock Market

Investment decisions based on emotions does not benefit the investor in the long run. It is unwise, not to mention, illogical, to get rid of stocks with great long-term returns simply because of short-term down periods. To tide over a bear market and your nerves, sensible precautions should be taken (i.e. diversification) to reduce risk.

(2) Be Wary of Growth Stocks

Growth stocks are stocks that have considerable potential for capital appreciation. Usually, this is synonymous with small-cap stocks. These are companies still at the beginning stage of their growth, and hence, are seen to have great potential to for large capital appreciation in their stocks compared to blue chips. This includes technology and healthcare stocks, as well as fad companies.

Although small-cap stocks tend to outperform blue chip stocks in a bull market, they are usually hit the hardest in a bear market. It is difficult to predict how long a bear market will last, when it will actually happen, and the severity it.

To protect your portfolio from significant decline, it may be wise to hold more value stocks during a bear market. According to Investopedia, value stocks are stocks that are trading for less than their intrinsic value. In other words, these are the stocks that are undervalued. Also, value stocks tend to pay higher dividends (though not always). Value stocks may hold their share prices well during bear markets or even appreciate in value. Investors can look at value investing as a bulwark against the bear market.

(3) Treat Declines as Sales

When stock prices fall, don’t fret. By shifting your perspective, a decline can be seen as the financial market having stocks sale. After the crash in 2008 had reached its worst in early 2009, the value of stocks doubled its value in merely two years.

Stocks usually hit rock bottom when pessimism is at its pinnacle. This is because those who were motivated to sell their stocks have already sold, leading to a selling spree that has worn out. Warren Buffett focuses on the value of the business model rather than the short-term stock price of the firm. You should as well.

While you should not be purchasing just any stocks after a price fall, buying blue chip stocks will be more affordable during this period. Investors who purchase blue chip stocks with strong business model during the bear market may enjoy large capital appreciation of their stocks in the long run.

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