It’s been a rough start to the year for new and tenured investors. After hitting record closing highs in early January, both the benchmark S&P 500 (SNPINDEX: ^GSPC) and iconic Dow Jones Industrial Average dipped into official correction territory (i.e., declines of at least 10% from their highs) in March. Worse yet, the growth-focused Nasdaq Composite fell into a bear market between mid-November and mid-March with a 22% drop.
Although bear markets are a natural part of the investing cycle, they can still be scary for a variety of reasons. For instance, the velocity of downside moves in the stock market often dwarfs upside moves — when the market begins falling, it tends to do so really fast, whereas moves higher are more gradual. Additionally, it’s impossible to know ahead of time when a bear market will begin, how long it’ll last, or how steep the ultimate decline will be.
Despite these unknowns, putting your money to work during bear markets can be an exceptionally smart move. What follows are five genius bear market investing strategies that have the potential to make you a lot richer.
The first strategy is arguably the most important: Relax and play the long game.
Stock market corrections and bear markets are a normal and inevitable part of the investing cycle. Since the beginning of 1950, the S&P 500 has endured 39 corrections of at least 10%. This works out to a double-digit decline, on average, every 1.85 years. Even though Wall Street doesn’t follow averages, it gives you a good idea of how common double-digit percentage declines are.
However, the average stock market correction doesn’t last very long. Out of the previous 38 corrections (I’m excluding the ongoing correction since we don’t know how long it’ll last), the average length was only 188.6 calendar days , or about six months. If we narrow it down to just the past 35 years, which is when computers became common on the trading floor and disseminating information to Main Street started to become easier, the average correction length drops to just 155.4 calendar days, or about five months. Comparatively, bull markets typically last for years, with every notable correction eventually erased by a bull market rally.
What’s more, data from Crestmont Research shows the rolling 20-year average annual total returns for the S&P 500 between 1919 and 2021 have never been negative . What this means is if you bought an S&P 500-tracking index at any point between 1900 and 2002 and held on for 20 years, you made money. In fact, only two of the 103 end years examined produced an average annual total return, including dividends, of less than 5%. This compares to more than 40 end years where your average annual total return was 10% or higher. 2. Dollar-cost average into your favorite stocks
A second genius way to invest in a bear market is to dollar-cost average into your favorite stocks.
As noted, it’s impossible to know ahead of time when a bear market will occur, how long it’ll last, or how steep the decline will be. But every correction is eventually wiped away by a bull market rally. As long as you’re invested for the long haul, this makes bear markets and double-digit percentage corrections the perfect opportunity to put your money to work.
Dollar-cost averaging is a way to take part of the emotional aspect out of investing and put money to work in your favorite stocks at either regular intervals, regardless of price, or perhaps at specific share price points. Edging into the stocks you like over time can allow you to build up a position without the regret of feeling like you bought in too early or at a disadvantageous price.
Another reason dollar-cost averaging is such a smart strategy is because the major indexes tend to increase in value over time. If you took the above data from Crestmont Research to heart and put dollar-cost averaging into action, you’ll have a really good chance to build wealth over time. 3. Consider basic necessity/defensive stocks
Related video: Are we in a bear market rally? (Fox Business)
If you’re looking for an even more specific bear market investing strategy, buying stocks that provide a basic necessity good or service, or operate in defensive sectors or industries, is typically a smart move.
As an example, electric utility stock NextEra Energy (NYSE: NEE) has delivered a positive total return, including dividends, in 19 of the past 20 years . Electricity is a basic necessity service, and demand for electricity doesn’t change much […]
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