All our investments make us look like Warren Buffet during any bull run, but what happens when the market inevitably turns south? Of course, it’s never a good idea to panic and sell your investments, but you should prepare yourself to navigate the stock market when stock prices are dropping. So where should your money be? Below are a few bear market investing tips from financial experts.
Evaluating Your Risk Tolerance
Many new investors will hear the phrase “timing the market,” meaning you should buy stocks at their lowest price and sell at their highest prices. The first piece of advice for any serious investor is to understand that you nor any other investor can accurately time the market.
Scot Johnson (CFA, Principal & Chief Investment Officer) of Adell, Harriman & Caprenter Inc. notes, “Investors, whether professional or part-time, would be wise to avoid thinking they can accurately and consistently predict the onset or the end of recessions and bear markets.”
Scot says that bear markets are simply an inevitable part of the natural economic cycle. So instead of attempting to time the market, investors should focus on “quality” investing from the start. By focusing on quality, investors will build a durable portfolio that can withstand economic downturns.
Additionally, Scot adds, “We can apply a quality filter across every economic sector of the stock market.” When we look for quality, we first look for consistency in profitability. We also look for what we term “high-quality earnings,” where earnings and the cash flows they produce are fairly tightly aligned.
Related: How Investing in the Stock Market Can Be a Beneficial Side Hustle
Value Investing: Focusing on companies that are undervalued in the market
Part of Scots investment strategy is to find shareholder-friendly companies. Companies that pay regular dividends and raise their payouts consistently would fall into this category.
Another quality aspect is finding stocks that have embraced share repurchase plans. By adopting these repurchase plans, companies allow “management more flexibility in execution than a dividend commitment, but still benefit shareholders by buying back undervalued shares, returning excess cash to shareholders and managing the number of outstanding shares.”
To further bolster a high-quality portfolio, Scot recommends investing in companies that provide “necessity” goods and services as these tend to be more resilient during poor market conditions. Historically, the Consumer Staples, Healthcare, and Utility Sectors provide stability as we can’t live without them regardless of market conditions.
Companies in these sectors can often be among the more generous dividend payers. Despite their falling stock prices, paying out substantial dividends makes investments in these companies even stronger and more attractive during difficult times.
Blaine Thiederman (MBA, CFP), Founder and principal advisor at Progress Wealth Management, has a similar outlook on bear market investing.
“Everyone is looking for a magical place that rebounds faster and is an optimal place to invest your funds.” The issue is that no one really knows for sure where to invest their money at all points in time. “What’s really important is focusing on what we know for sure.”
Blaine points to rising interest rates and the conflict with Russia. The Fed will likely raise interest rates soon, and the conflict currently spooking some investors should be short-lived.
Because of this, he believes it’s likely the markets will rebound and this year will end on a positive note.
Importance of Patience and Discipline
Blaine states, “With every investor that I work with, I’m having them stay focused, disciplined, and not paying attention to this short-term correction because objective logic (not luck) is what helps reach our goals. If you invest in a less than diversified portfolio during a correction, you could guess wrong and regret this decision indefinitely.”
For this reason, Blaine recommends his clients stick to a passive, indexed portfolio. He reiterates, “Because investment decisions, like our health-related decisions, need to be objective, testable, and provable.
Without this, our ability to reach our financial goals in life is based on hope and a dream, and that’s not good enough.
For financial goals that are 3+ years away, Blaine recommends a well-diversified and boring portfolio that utilizes low-cost index funds. For significant purchases less than three years from now, using a high-interest rate bank account that offers a deposit bonus is the safest place for your money.
Attempting to time the market will almost certainly result in more failures than successes for any investor. Instead, it’s best to prepare for poor market conditions by already investing in safe, solid, well-established companies and index funds. By being proactive, instead of reactive, you can rest assured you’ll be able to weather any economic storms that may come.