Long-term investors will face numerous bear markets, during which they should generally take a defensive posture, avoiding the fast-growing but often money-losing stocks that are the performance leaders in better times.
Due to falling stock prices, investors tend not to want to add shares in a bear market. However, many industries serve needs that remain constant in good times and bad, and other stocks that suffer during these times will likely recover.
Index funds
Investing in index funds is a popular choice. For those with little interest in investing, it provides an entry into specific stock categories through a diversified and safe approach.
Prospective investors can find index funds for numerous investment categories and risk levels, but one of the more popular indexes is the SPDR S&P 500 ETF Trust (SPY +0.25%). This places investors in 500 of the largest publicly traded companies.
Shareholders should not expect equal weighting of each component. The S&P 500 does not amount to a 0.2% share in every stock, and other funds often weigh some holdings more heavily than others in anticipation of a better performance.
And in a bear market, investors can likely buy at a lower price. Going back to the example of the S&P 500 fund, it lost 25% of its value at the lowest point of the 2022 bear market. So a $10,000 investment would have bought that many more shares. Investors planning to stay in the market for a long time should welcome such buying opportunities.
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Dividend stocks
Another possible option for a $10,000 investment is dividend stocks. Dividends offer cash payments that investors can either take or reinvest. The S&P 500 has an overall dividend yield of about 1.5%, but individual components in that index can offer much higher returns, and some of those increase the payout periodically.
Admittedly, most companies can increase or take away a dividend at any time. But many increase their payouts periodically. Those who have done this for 50 years or more are called Dividend Kings. Since missing an annual increase would cost the company that status, they almost always increase the dividends yearly.
This factor becomes even more true in a bear market. A $50-per-share stock with a $1-per-share annual payout offers a dividend yield of 2%. However, if market conditions take the stock price down to $25 per share, the yield rises to 4%. Falling stock prices increase cash returns.
Moreover, such a company must consistently maintain positive free cash flow in the long run to afford to make dividend payments. Thus, the strongest long-term track records for dividends tend to be for stocks that can perform well in bear markets.
This makes Dividend Kings such as Coca-Cola (KO 0.17%) and Procter & Gamble (PG 0.19%) desirable in bear markets. History shows these companies have continued to increase payouts in bear markets, earning investors higher yields from lower stock prices and payout hikes.
Also, customers tend to consume these companies' products regardless of the economy. This means they can likely afford to keep paying dividends even if investors temporarily sour on their stocks.
Investing $10,000 in a bear market
Although investors may feel skittish about buying stocks while prices are falling, such conditions can work to their advantage, especially in indexes and dividend stocks. Indexes like the S&P 500 offer diversification and tend to buy into more stable investments.
Moreover, dividend stocks offer stability, as they must produce sufficient free cash flow in the long run to sustain the payout. Additionally, investors can buy more index shares and earn higher dividend yields in a bear market, and an amount as high as $10,000 could bring considerable returns over time. So not only should they invest in a bear market, but they should also look forward to buying desired indexes and stocks at lower prices.
