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Here Are 4 Ways You Can Benefit From Investing in a Bear Market

By Diane Mtetwa – Dec 9, 2020 at 2:48AM

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You'll see your accounts decline in value, but you can still come out ahead.

When you're in a bull market, month after month or day after day (depending on how often you check), it can be easy to forget that all good things must come to an end. At some point, you will have to face a bear market.

During this time, you're tasked with staying calm while watching your balances dwindle. This can be tough, but keeping these four things in mind will help. 

Scared cartoon man in front of falling stock chart

Image source: Getty Images.

1. You can buy at lower prices

You hear that you should buy your investments low and sell them high, but actually accomplishing this is not so simple. That's why bear markets are a great opportunity for you to scoop up that stock or ETF you've been eyeing at a discounted price. 

There's always the possibility that you don't time the bottom perfectly, and you end up buying a security that declines further in price, resulting in a loss. You can limit fears of this happening by dollar-cost averaging. When you do this, you set aside a pre-determined sum of money that you will invest every month or quarter. Some trades, you'll buy higher prices, and others, you'll buy at lower prices, but most importantly, you'll be investing your money instead of missing out. 

2. You get a better understanding of your risk tolerances

Watching your investments soar in value is fun, but those feelings of elation will take a turn for the worse when you start losing money. Now, with your livelihood seemingly at stake, you may even have an overwhelming desire to let fear take over and to sell everything, waiting to invest again only when the markets stabilize. 

If this sounds familiar, you might be invested too aggressively. The riskier an investment is, the more it should rise during a bull market, but the harder it could fall during a bear market. That is why a downturn in the stock market will give you an excellent idea of your risk tolerance. After your nerves have been tested and you've figured out how much you can stomach, you can make adjustments to your investing strategy and holdings accordingly. Doing this will help you feel less nervous about market volatility going forward. 

3. You learn to control your emotions 

If you've survived a bear market before, you know from firsthand experience that your accounts eventually rebounded. How long the recovery takes depends on the length of the bear market and the severity of the decline, but there has never been a time in history when the markets didn't recover. During two recent market crashes, the tech crash of the early 2000s and the Great Recession of 2008, investors who were 100% invested in large-cap stocks recouped their losses within four years of the bear market ending.

Knowing that the markets have historically always come back, you can better control your emotions by implementing time horizons. Money that you need in the short term can be invested more conservatively and won't fluctuate as much when the stock market does. Money that you need in the long term can be invested more aggressively. Even though this money could potentially lose the most, it will have more time to recover losses. 

4. Become a more consistent investor

Missing out on even just a few good stock market days could cost you big. A study done by JP Morgan looked at the time period between Jan. 3, 2000, and Dec. 31, 2019. It found that the S&P 500 earned an average annualized return of 6.06%. If you missed out on the best 10 days during that period, your return shrank to 2.44%. Missing the best 30 days put you in negative territory at 1.95%, and missing the best 60 days over this 20-year period of time would've resulted in an annualized loss of 7.02%. 

Consistency as an investor simply means you give your investments time to grow. If you try investing only during the good times, you will likely find that market timing is a losing game. You may do so successfully a handful of times, but more often than not, you will miss the mark, and your returns will suffer. This is why investing through a down market will not only make you more consistent but could also help boost your overall returns. 

Investing during bear markets requires that you trust in the stock market despite your fears. This can be incredibly hard. Learning how you can maximize the positives and benefit from this period of fear will help you weather the eventual storm and come out of it as a better investor

Diane Mtetwa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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