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November 12, 2019

How to Get Rich in a Bear Market

Markets go up and markets go down. This is a fact of life that all investors learn to accept.

You might hear that you can only make money when the markets are rising. But the reality is, fortunes have been made and lost in bull markets. Let’s take a deeper dive…

Bear Versus Bull

The bear and the bull market. Both are terms usually used in a stock market but can also be used to describe anything that’s traded – like real estate, bonds, and commodities, for example.

A bull market happens when prices are rising continuously for a prolonged period of time.

A bear market, on the other hand, is where prices are falling for a prolonged period of time.

That’s it.

Bull and bear are also terms used to describe the position of a trader in the market. A Bullish trader is optimistic and aggressive, expecting the market to go up. A Bearish trader is, again, the opposite, being conservative and expecting a future market downturn.

Source: www.ftportfolios.com

Since 1926, the average length of bull markets has been 6.6 years while the average length of a bear market is 1.3 years. We’re currently experiencing one of the longest upward trends in history.

If you’ve lived most of your investing life in a bull market, like some millennials or people just starting out, it can be challenging to suddenly see your portfolio with a freefalling value.

Investing with Emotions

The typical advice is to buy low and sell high. It may sound like a simple concept to follow, but when the market shifts, it’s a whole different story.

Imagine you had $10,000 invested into stocks. That’s not a life-changing amount of money, but it’s a pretty decent sum. Now imagine the market suddenly shifts and we’re in bear territory. Your stock portfolio suddenly loses half its value overnight. How would you feel? Pretty horrible right?

Now imagine that it halves again. And again.

Now imagine it was your life savings.

A bear market is when things lose their value and that includes your investments. Market crashes happen and portfolios have sometimes historically lost 90% of their value.

When you lose something as important as your life savings it’s difficult not to get emotional.

A lot of people buy when they see the market performing well. They assume that prices will continue to rise. And when the market takes a turn they panic and sell while prices are in freefall.

They buy when the prices are high, and sell when the prices are low.

So What Should I Do?

When stock prices nosedive the important thing to remember is that you’re not actually losing money, things are just valued differently. You still hold the same amount of stocks, the same properties, It’s just that people are less willing to buy them at higher prices at that moment in time.

Unless you used leverage to acquire your holdings, you’re probably not in a much worse situation than when you started.

In reality, a bear market is a situation rife with opportunity.

Buy when everyone else is selling

As people panic and sell their investments at rock bottom prices, the clever investor can swoop in and buy what’s on sale. Bear markets are golden opportunities to buy assets on the cheap.

If you know that your investment has intrinsic value and plan to hold for the long-term, then this is the perfect opportunity to acquire more assets for your portfolio. 

Buy stocks when others just want to “cut their losses.” Buy some real estate when everyone else is going into foreclosure.

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.” ~ Warren Buffet

Some Scenarios

Source: macrotrends.net

You can get the maximum value for the assets if you buy at the lowest point of the market. Let’s say you bought some S&P 500 stock for $1,000 at the lowest point of the bear market in February 2009. By now, that stock portfolio would be 272.028% larger at $2,720. If you reinvested your dividends then the amount would be 359.296% at $3,592.

But it’s impossible to time the market and we’ll never know when we’ve hit the bottom until we’re way past it.

So what do you do? Buy DURING the bear market!

With the power of dollar-cost averaging and investing for the long-term, you’ll get more shares and have a more sizable investment than if you just stopped investing when the bear market comes.

Let’s say you distribute your $1,000 into smaller purchases in the years of the bear market.

Source: dqydj.com

Compare that to just buying before the bear market starts and stopping.

Source: dqydj.com

So comparing the two scenarios in the table below, when you invest the same amount during the bear market rather than all at the beginning of the bear market, you can get 35% more shares even if you only get half the dividends.

Why? Because you’re buying on sale.

Buy value

This does not mean buying everything that’s cheap. Having a low price now doesn’t guarantee that a stock or a house will have a high value in the future.

Make sure you read up on our Investing 101 and Advanced Investing articles.

Hedge against volatility

One thing you can do is hedge against volatility with alternatives like commercial real estate, specifically Multifamily real estate.

Multifamily commercial real estate has experienced 3-4X fewer down years than the stock market, making it a low-volatility asset class.

Multifamily does not up and down with the market. The demand for larger accommodations, new homes, and luxury places decreases in a market downturn, making multifamily an attractive option in a recession.

 

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