Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



How to Buy Stocks in a Bear Market

It's hard to predict where the stock market will go in 2014, so it is critical for investors to maintain a disciplined investing strategy. My strategy requires a lot of cash, discipline to buy incrementally on down days without acting on emotion, and a focus on defensive stocks that tend to hold up better than the general market in a correction.

I like consumer non-cyclical stocks like Colgate-Palmolive  (NYSE: CL  ) , Church & Dwight  (NYSE: CHD  ) , Hershey  (NYSE: HSY  ) , and J.M. Smucker (NYSE: SJM  ) .  These companies sell household and food products that are consumed daily. They also pay steady dividends. And the best thing going for conservative investors who hate big swings in the market is that these stocks all share low betas, meaning their volatility is less than the general market.

The following chart illustrates important metrics recorded on Feb. 5: 

Name Yield Beta YTD Change
Smucker  2.47%  0.51 -10.42%
Church & Dwight  1.80%  0.39   -4.87%
Hershey  1.98%  0.17  +3.58% 
Colgate-Palmolive  2.26%  0.38   -7.35%
SPDR S&P 500 ETF   1.82%  1.00   -5.15%
3D Systems  0.00%  1.89 -31.02%

In general, stocks with high betas like 3D Systems are considered higher risk because they deviate more than the general market, while stocks with low betas tend to carry less risk because they deviate less than the general market.

The chart shows Hershey holds the lowest beta and indeed was the only one with a positive return, albeit a small one, for 2014. Church & Dwight and Colgate-Palmolive also carry low betas with lower volatility. 

As a conservative investor I favor stocks that hold their value in the marketplace while delivering ever-increasing cash dividends to the owner. Viewing investments in the manner of Warren Buffett's intrinsic value, an investment should be measured by how much cash you can extract from it over time. Hershey, for example, has raised its dividend 51% over the past five years while the stock gained 198% compared with SPDR S&P 500 ETF dividend up 53% while the exchange-traded fund was up 137% in five years.

Dividend reinvestment
I rarely take advantage of automatic dividend-reinvestment plans for stocks. All dividends are to be paid in cash. The smart investor shall decide what's on sale at the time cash is delivered, and, if nothing is desired, then it is just fine to let cash sit. Inflation is tame right now, at around 1.5%, so while cash may lose some value to inflation, it is the best defense in a bear market.

The S&P 500 index rose 30% in 2013, topping off four years of successive growth in the S&P 500 since the bottom of March 2009. So far this year the S&P 500 was down -5.2% through Feb. 5. I am prepared for the market to operate in bearish territory or swing sideways for most of 2014.

Several pundits on CNBC have predicted a 10% correction. But what if there is no correction? What if we are experiencing the bottom now? No bell is going to ring saying, "This is the bottom, buy now."

As a result, I am picking off only tiny fractions of the total number of shares that I intend to buy over the next nine months. I may be catching a falling knife and getting stabbed, but I believe the wound is only temporary and over the long term these consumer stocks will rebound eventually.

A mathematician once told me to buy in fourths and fifths -- meaning if you want to own 100 shares -- you buy 20 shares at a time. I would argue that during a bear market, you may want to buy in ninths or tenths. This way you protect yourself when stocks fall rapidly in price; you may be losing money on your first two purchases, but you have the opportunity to catch the stock at a cheaper price with your future trades.

Final thoughts
Buying and selling in a bear market is a challenge. When most investors are running scared from the market, a smart investor with a clear, disciplined approach can use a correction as an opportunity to pick up shares. Consider buying in small increments over time to reduce risk.

Start investing asap
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2823537, ~/Articles/ArticleHandler.aspx, 8/28/2015 8:34:52 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Michael Hooper

Today's Market

updated Moments ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:04 PM
CHD $86.85 Up +0.31 +0.36%
Church & Dwight Co… CAPS Rating: ***
CL $63.35 Up +0.26 +0.41%
Colgate-Palmolive CAPS Rating: ****
HSY $90.20 Down -0.04 -0.04%
The Hershey Compan… CAPS Rating: ****
SJM $117.59 Up +1.30 +1.12%
J.M. Smucker CAPS Rating: *****