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Bear Market Investing

Bear market investing creates different strategies to enhance the value of your portfolio. If you have lost money on our stock investments then you probably want to find a way to regain what was lost. To take advantage of a bear market and turn your portfolio around there are several strategies that you should consider. These include the impact of losses, change in your approach, and taking control of your investments.

Recognize impact of negative returns

Many people hold on to their losses, hoping that when the bear market is over and the economy starts growing again. They believe their portfolio will improve as well. Unfortunately, hoping for a return to the way it was is a bear market investing strategy that is not likely to succeed.

One of the factors to understand is it takes a higher return to recover from a loss. As the loss increases, the return required to just breakeven grows significantly due to the negative effect of compounding. The table below shows the return required to get back to even. If you experience a 20% loss, a 20 % gain after that loss does not bring you back to even. As shown, you will need to generate a 25% return to just breakeven after a 20% loss. The higher return is required since your portfolio now has a lower value to generate gains. If your loss is greater, it requires an even higher percent return to breakeven.

Impact of Negative Returns









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 Value with same % gain











 Percent Return Required to Breakeven











As the loss increases, the return required to just breakeven grows significantly due to the negative effect of compounding. This and the higher volatility that is normally experienced in a bear market cause losses to be more significant as explained in the article “The Dark Side of Compounding” on Investopedia by Hans Wagner, the principle owner of Trading Online Markets LLC. A core principle of bear market investing is to minimize losses.  Warren Buffett's first rule of investing is to not lose money.

Change Your Approach 

An interesting quote is fitting for every investor, when they encounter losses. I could not find who originally stated it, but it goes something like this:

If you always do what you have always done, you will always get what you have always gotten.

Or its corollary:

"Insanity: doing the same thing over and over again and expecting different results."

-Albert Einstein

Bear market investing requires you to change your approach. Investors who lost money in a bear market should not expect to quickly recover what they lost unless then change their approach to investing. Since money is the third most important thing in our lives, behind health and family, it is important not to ignore it. Rather, we need to adjust our perspective and take control of our situation.

Those investors who are able to survive and beat the market, take a disciplined approach that recognizes the current economic and market environment. This may require you to take more control over your investing actions.

Bear Market Investing Strategies

Bear market investing requires some adjustments to the strategies used in a bull market. More importantly, it requires investors to take control of their investing decisions so they can learn to beat the market.

Here are some bear market investing strategies to consider:

  1. Change your mind set from one who only owns stocks for the long run to one who recognizes it is OK to sell, especially when the market is going against you.

In a bear market, many investors are afraid to sell their shares, once they have made the decision to buy. They fear they might be wrong and the stock will rise again. Alternatively, they do not want to take a loss, indicating they expect the share price to rise to where they purchased it, when they will sell. This thought process continues until the shares have dropped even further, resulting in greater losses.

In a bear market, investors who close out a loosing position will go a long way to helping to keep their sanity as well as their money. Moreover, many of the companies that have experienced substantial losses in a bear market may not be the ones that recover quickly. Rather, firms that are better positioned for the recovery tend to outpace the market.

Finally, when you are fortunate enough to have a winning position, it is a good idea to sell at least half of your shares after a quick gain to capture some profit. You can let the other half run with a trailing stop that is set above your entry price. This way you can generate profits during a bear market rally.

  1. Strive to be on the right side of the trend.

Most of a stock’s price movement is due to the trend of the market and the sector. This is especially important during a bear market when the overall trend is down. However, bear markets are characterized by rallies that can rise 20% or more before turning back down. While your bias on the trend should be to the down side, bear market rallies offer good opportunities to generate profits, if you are in the right sectors that are leading the trend up.

If the trend is down, add downside protection such as covered calls and protective puts. You can also employ short Exchange Traded Funds (ETFs) that allow you to short an index and or a sector. Shorting a sector can be especially successful, if that sector is the one leading the market down.

  1. Employ proven capital management techniques to protect your capital.

Investing in a bear market brings home the need to employ techniques that protect your hard-earned money. This starts with trailing stops to minimize losses and/or capture some profit from an investment. Another important technique is to rebalance your portfolio more frequently. Rebalancing capitalizes on short-term cycles in the financial markets. By selling part or all of the top performers in one asset class or sector, it provides capital to invest in new promising opportunities. A variation of this strategy is to sell part of your position when you have a quick gain to capture some profit and move the stop to or above your entry price.

  1. Reduce threat of losses by employing risk reduction strategies.

There are a number of ways to reduce the risk of losses in a bear market. One method is to close out your long positions and move to cash. After all, cash is a position as well.

Another is to avail yourself of protective put options that can limit your risk of losing more than a set amount of money on a stock or ETF position. The Protective Put Option Strategies article introduces use of put options to limit your down side risk.

A third method is to be long in sectors that are likely to do better in a bear market and be short in sectors that are likely to perform poorly in a bear market.

  1. Invest in yourself.

If you have depended on a broker to advise you on how to structure your portfolio, you probably realize that you need to take more control over your investment decisions, especially in a bear market. There are several excellent books in the Investing Library that can help guide you on your journey. In addition, the Learning Center includes a growing list of articles designed to help investors become proficient and take control of their financial future.

Taking the time to develop bear market investing strategies will enhance your financial future. Even if you continue to work with a broker or financial advisor, you will be a better client and help to direct your future. Moreover, you will know what questions to ask of others. Hearing and understanding the answers will go a long way to enhancing your understanding of the economy and the markets. You portfolio will thank you as well.

The Bottom Line

Investing in a bear market requires different strategies to be successful. Bear markets challenge investors to employ investing strategies that reduce loss of money while offering opportunities to make nice profits for those with the discipline to do so. By taking the time to learn to invest in a bear market, you will have equipped yourself for greater financial success. I will also improve the performance of your portfolio.

If you wish to read more on strategies to invest in a bear market I suggest reading:

How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition by William J. O'Neil is an excellent book on how to pick winning stocks.

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