If you compare your investment portfolio today to what it looked like a few weeks ago, you're apt to be very unhappy with what you see. The stock market's recent plunge has driven us into bear market territory, and that can take a toll on even the most level-headed investors.
If you're not familiar with the term, a bear market is defined as a stock market decline of 20% or more from recent highs that lasts at least a couple of months. Often, bear markets last longer, and can even spur full-blown recessions.
But there's an upside to bear markets, and it's that they offer opportunities to buy otherwise expensive stocks on the relative cheap. Now to be clear, borrowing money to invest during a bear market is a risky move, and raiding your emergency fund to free up cash to invest is a terribly bad idea. But if you have extra money on hand to play around with, it pays to capitalize on the fact that stock prices have come down across the board. With that in mind, here are a few tips for investing during a bear market.
1. Look to the future
It's hard to predict how long a bear market will last, and in some cases, they can be quite drawn out. As such, don't invest in a bear market with the hopes of buying low and getting rich within the year. That's unlikely to happen. Instead, take a long-term approach to investing, and assume that any stocks you buy now are stocks you'll continue holding for a number of years. Incidentally, that's a smart approach for stock investing in general.
2. Buy dividend stocks
Companies with a long-standing history of paying dividends are often able to uphold that practice even when their stock prices tumble. As such, now could be a good time to add dividend stocks to your portfolio. In doing so, you'll not only start generating a steady income stream, but you'll also give yourself an opportunity to reinvest your dividends as they start hitting your account.
3. Don't attempt to time the market
Timing the market is generally an ineffective investing strategy -- there are numerous studies in support of that fact. Rather than aim to buy stocks when they're at a so-called low during a bear market, employ a strategy called dollar-cost averaging. With dollar-cost averaging, you commit to investing the same amount of money in the same stocks or funds at regular intervals, regardless of what prices actually look like. It's a smart strategy in general, but one that can really pay off during a bear market, as it effectively forces you to add to your portfolio at times when most investors might balk, thereby potentially snatching up some stellar deals.
4. Add highly rated bonds to your portfolio
Though there's no need to shy away from stocks during a bear market, it also pays to divert some of your money to bonds. Not only are bonds less volatile, but the interest they pay can serve as an additional income stream, thereby giving you more money to reinvest or use as you see fit. Though many bond investors favor corporate bonds, it pays to consider adding municipal bonds to your portfolio. Their interest is always federal tax-exempt, and if you buy municipal bonds issued by your home state, you'll avoid state and local taxes as well.
Investing in a bear market can be a scary prospect, especially if you're new to it. And to be clear, we haven't had a bear market in over 10 years, so it's a novel concept for many. But rather than expend energy fearing the bear market we've landed in, aim to use it to your advantage. You may not reap the rewards initially, but over time, the upside could be huge.