New or inexperienced retail investors often believe that a bull market means an opportunity to make money and a bear market is synonymous with losing money. Although the market’s trajectory can make your investment fluctuate in value, it does not necessarily mean that you cannot make profits during a bear market.
In fact, for the discerning investor, there can be excellent potential opportunities to invest during a bear market. Astute investment choices during a bear phase can bring enormous profits after the market rebounds.
This post discusses six useful strategies that you can employ during a bear market to make profits.
Maximize your Roth IRA and 401(k)
Consistently purchasing index funds through your Roth IRA and 401(k) can be a smart way to develop an investment portfolio with a high potential for profit. The stocks you purchase during a bear market would then get back up in value as the market recovers.
In the long run, maximizing your 401(k) contributions is highly profitable, especially if your contributions are matched in part or full by your employer. The money in your account can then be used to invest in a large variety of stocks and you can enjoy the rewards after the market climbs up.
Choose Dividend-Paying Stocks
Dividend-paying stocks can keep a steady income stream coming during recessionary economic conditions. This is one of many reasons why they can be a prudent investment choice during a bear market. While stock valuations of a company can be decided mostly by market buying and selling trends, the company profits usually determine the dividend payments.
Large businesses that are strong in their fundamentals are more likely to be immune to market conditions and will keep paying dividends to shareholders consistently. This means that your income stream is maintained even if a downturn causes the stock market values to plummet. The stock price increases after the market recovery, thereby also increasing the value of your portfolio.
Invest in Businesses that are Profitable and Reliable
When a recession or market downturn causes the stock valuations of highly profitable companies to go down due to high levels of selling, it can present a compelling investment opportunity for you.
Panic can cause many casual investors to quickly sell their stocks when a recession seems impending. The selling frenzy that results can drastically bring down the value of companies, including the financially stable ones with robust potential for growth. These stocks can then be purchased at very low prices and you can wait for the market to recover for your rewards.
So, how do you find the right stocks to purchase during a bear market? Here are some important factors you can look at:
- Good financial ratings (rated A or above by independent agencies)
- Good bond ratings (rated A, AA, and AAA)
- Excellent sales figures
- A strong growth outlook
- Optimum debt-to-assets ratio
Choose Stocks that Historically Perform in Bear Markets
Bull and bear markets do not have the same kind of effect on all sectors of the economy. Quite a few sectors, including automobile, home improvement, machinery, and technology industries, tend to perform well in bull periods. However, some sectors show healthy performance during bear periods as well. These usually consist of industries that support basic human needs, including utilities, food and beverages, and pharmaceuticals.
Buy Top-Rated Bonds
Equity investments can go down in value during a recession or downturn. Bonds and bond funds present an investment that can be safer than equities and can provide guaranteed returns, allowing a means to offset your short-term losses. Municipal bonds, treasury bonds, and other corporate bonds rated AA or AAA can be stellar options. Exchange-traded funds that invest in these bonds and fixed-income investments of different kinds can also be viable options.
Purchase Stocks on Margin
Your brokerage firm can provide you a margin loan to purchase depreciated stocks. After the recovery, you can sell these stocks, pay the loan back, and still end up with a profit. Seasoned investors use this strategy frequently in bear markets.
However, it is important to exercise caution. If the stock value does not appreciate after recovery, you would have to take a loss and repay the loan out of pocket. Only stocks with a notable decline in value and a high chance of appreciation post-recovery should be considered.
Final Considerations
With these tips, short and long-term gains can be possible during a recession or downturn. Trying to “time the market” can be disastrous. Instead, invest regularly and treat market crashes as a unique investment opportunity if you have the financial capacity to ‘buy and hold’ for the long term.