What is a Bear Market? Investment Strategies in a Bear Market

This year has not been a bullish year for investors, as many have suffered significant losses in stocks, gold, cryptocurrencies, and other popular markets. As of now, the three major U.S. stock indexes - Dow Jones Industrial Average, S&P 500, and NASDAQ Composite - have all fallen by 10.83%, 20.89%, and 33.04% YTD, respectively. The Hang Seng Index has also reflected the same bearish trend, down 30.93% YTD.

The plummeting share prices indicate that a Bear Market is approaching, which is the last thing investors want. However, despite the declining value of assets in a Bear Market, astute investors are still able to seize opportunities to earn profits.

Masthead Image

What Is A Bear Market?

Understanding what a Bear Market is is crucial before delving into strategies for investing in one. A Bear Market is typically identified by a 20% decline in asset prices from recent highs across the entire market. For example, the Hang Seng Index's plummet of around 30% YTD clearly marks a Bear Market, particularly given that it's considered a benchmark indicator for the overall stock market in Hong Kong.

Bear Markets can be caused by a variety of factors, with fear of a declining trend and uncertainty about the future being the two most significant. For instance, the U.S. Federal Reserve's continuous aggressive rate hikes this year have sent a message that these hikes will put downward pressure on corporate earnings and result in a bearish trend. Additionally, political disputes between China and the United States have raised concerns and doubts about Hong Kong's future, leading to a dramatic drop in the Hang Seng Index.

However, despite the challenges posed by Bear Markets, there are still opportunities to earn profits. Here are four smart strategies for navigating through the sluggish trend.

How to Invest in A Bear Market?

1. Adopt the Strategy of Dollar Cost Averaging

This is the strategy that even Warren Buffet has long advocated. In simple terms, you can guarantee yourself a lower average cost for your investment in stocks by investing regularly over a long period of time.

This strategy is particularly useful under a Bear Market in three aspects:

  • Lower price:

    The Bear Market will end eventually and is usually followed by a longer bullish trend. Therefore, the Bear Market gives you good timing to buy high-quality shares at a lower price.

  • Ride out downturns:

    The duration of the Bear Market is hard to predict. Sometimes, investors think they already purchased the stock at the bottom price, but it often turned out that the previous bottom price continued to dip deeper. By investing periodic amounts in falling markets, investors can diversify their risks to ride out market downturns.

  • Discipline:

    The dollar cost averaging strategy requires investors to persist in periodic investments, removing the emotional factors from investing. Everyone knows he or she should buy low and sell high, but not everyone has the courage to really do that when the market is down. Thus, the dollar cost averaging strategy adds discipline to your portfolio, helping you resist the inborn weakness of human nature.

The dollar cost averaging strategy usually applies to investing in index funds or exchange-traded funds. By investing in the index funds of Hang Seng Index, S&P 500 or other similar index, you will diversify your risks and cover a multitude of different listed companies.

2. Bet on Defensive Stocks

Defensive stocks are good choices offering a strong moat for investors as these stocks are expected to fend off competition and maintain profitability even under a Bear Market.

You may cut down your spending on luxury bags when the times are tough, but you still need to spend your money on food, transportation, medicine, and other necessities. In other words, investing in such defensive stocks will stabilize your portfolio's profits during different phases of economic cycles. You may cut down your spending on luxury bags when the times are tough, but you still need to spend your money on food, transportation, medicine, and other necessities. In other words, investing in such defensive stocks will stabilize your portfolio's profits during different phases of economic cycles.

So, what shares can be considered defensive stocks?

A defensive stock is a security that delivers consistent and stable earnings regardless of the state of the entire market.

The biggest cause behind the stable earnings is the constant demand for the products of consumer staples, including food and beverages, household goods, hygiene products as well as alcohol and tobacco for the addicted people. There is barely any chance that consumers will cut their budgets on these products no matter what their own financial circumstances.

Therefore, listed companies producing the above consumer goods for the public are the examples of defensive stocks that investors should consider in bad times.

3. Wait Patiently

The Bear Market will not last permanently, and after the bearish storm comes the bullish weather. Investors may find it tempting to stop their losses by selling their assets in the market, which will undoubtedly damage their long-earned profits. In such a Bear Market, waiting patiently may sound odd to you, but this is one of the core elements of the value investing strategy long advocated by Warren Buffet.

On the one hand, the months of a Bear Market are often shorter than the months of a bull market. Take the S&P 500 index as an example, stocks drop 36% on average in a Bear Market, while stocks gain 114% on average during a bull market. As a result, long-term investors can still manage to earn profits during economic downturns as long as they hold their stocks for a relatively long period of time. Thus, if you are a long-term investor believing in value investing, then holding your carefully selected quality stocks and waiting patiently until the downturns reverse is an option to survive a Bear Market.

On the other hand, investors can opt to wait patiently until the Bear Market is over. Some investors may rush to adopt the all-in approach during some early declines. But early declines often fail to signal the end of a Bear Market given that dramatic fluctuations are quite common. Bear Market will end eventually, but they are not fleeting in most cases. We recommend investors should wait patiently to search for quality stocks traded at a lower price during a bearish trend so that they can build stronger and safer positions at an unrushed pace.

4. Go Short Prudently

Short selling is another approach to earning profits from declining prices. Short selling involves opening positions by borrowing shares that the investor believes will go downward in value. These borrowed shares will then be sold to buyers and returned at a given time. If the prices of these shares drop, then the investor earns the profits from the price spread.

This strategy may look like a perfect match for the Bear Market , but it is actually an advanced strategy that should only be adopted by experienced investors. Because short selling requires margin accounts and can lead to damaging losses when markets rise and short positions are called in. Simply speaking, timing is essential in short selling: short selling stocks too early or too late will both cause harmful losses.

background image

Frequently Asked Questions (FAQ)

What is a Bear Market?

A 20% decline in the asset price from recent highs in the entire market is often regarded as a symbol of the Bear Market.

Should I stop investing in the Bear Market?

Investing in the Bear Market does not mean zero chance of earning profits. You can consider the following 4 strategies during the bearish trend:

  • Adopt the strategy of dollar cost averaging
  • Bet on defensive stocks
  • Wait patiently
  • Go short prudently