How to Survive and Prosper in a Bear Market: Experts Share Rock-Solid Investment Strategies

concept of bearish in stock market exchange, graphic of low poly bear with decreasing graph.
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With the economy firmly entrenched in a bear market, at least for the time being, many people are re-evaluating their assets and investments to make the right financial moves. Multiple financial experts GOBankingRates spoke with quoted Warren Buffett’s classic advice: “Be fearful when others are greedy and greedy when others are fearful.”

That doesn’t mean dumping your entire emergency savings account into low-cost meme stocks right now, of course. But it also doesn’t mean selling off your 401(k) as you watch it plummet.

“Do NOT change allocations in your 401(k) following a market downturn,” advised Stephanie J.H. Roberts, CFA®, CAIA, CFP®, wealth manager at Steward Partners in Albany, New York. “People don’t get advice on their retirement accounts and we have seen people who got scared and cashed out or got more conservative in a market downturn and ultimately hurt long-term performance.”

So what should you do in a bear market to not just survive, but thrive? Experts offered their top tips.

Revisit Your Long-Term, Strategic Financial Plan

“Before making any investment moves, people should make sure they have a long-term, strategic financial plan in place,” Roberts told GOBankingRates in an email interview.

“If you do not have a plan, now is a very good time to have a [financial] professional complete a deep, personal, comprehensive diagnostic,” said Barry P. Mitchell, Jr. — CRPC, CRPS, CAP, and founder and managing director at Next Level Private. “Once this is completed, they can help you find areas to access liquidity so that you can keep pace with inflation and have enough money to live amid rising prices.”

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He added that it’s important to pinpoint areas of liquidity that won’t hinder your long-term goals, such as saving for retirement.

Keep Your Emergency Cash Reserves Where They Are

Roberts also emphasized the importance of keeping three to six months of living expenses in the bank as an emergency cash reserve.

“This could be higher depending on your circumstances,” she said. “Cash reserves are especially important in a down market. When you may choose to use some of that cash to fund living expenses or large expenditures such as a car purchase or needed home repairs, rather than locking in losses in your portfolio at depressed values.”

She said it is also a good time to re-evaluate your expenses and “practice some financial discipline at every level.” She recommended possibly postponing big-ticket purchases and reviewing your monthly spending to find areas you can cut. If you’re already making ends meet in spite of inflation, freeing up cash could allow you to take advantage of the bear market. “Rather than making full-scale shifts to your investments, consider using new dollars to invest in quality stocks and dividends,” she said.  

Know Your Risk Tolerance

Experts agreed that it’s crucial to pinpoint your risk tolerance — and maintain a diversified portfolio to balance those risks. “If your investments are spread out across many stocks or ETFs covering the global stock market, you’re better placed to withstand a downturn. If your investments are concentrated in just a few stocks your investments could take a much bigger hit,” said Tony Molina, CPA and product evangelist at Wealthfront.

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Corey Briggs (CFP, CIMA with Plaza Advisory Group at Steward Partners Global Advisory) suggested that investors first max out their 401(k), and then start a Roth account to ensure that they are taking advantage of these investments while the market is down.

“Do not try to get too fancy and pick individual sectors or companies that may bounce back quicker. Take advantage of the entire market being down and ride the upside with a low cost fund that captures the entire market,” he advised.

Younger investors with greater risk tolerance may be in an even better position to add to their portfolios in a bear market. But it’s important to choose value stocks with solid fundamentals, experts say.  

“These past few months have been a great time to ladder some cash into the market and take advantage of discounted equities,” Briggs said. “During bear markets, growth stocks tend to get hit the hardest, while value starts outperforming. This is mainly due to their earnings stability, dividends, and appealing stability they show,” he added.  

Use Dollar Cost Averaging So You Don’t Have to Worry About Timing the Market

Mitchell recommended that investors use dollar cost averaging, with an eye on holding investments at least three to five years. “Invest a portion of what you’re able to comfortably commit to equities right now, maybe 25%, and dollar cost average the balance over the next six to 12 months,” he said.

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Take Advantage of Tax Loss Harvesting

Mitchell and Molina both recommended capital loss harvesting, or tax loss harvesting, to offset future potential gains. “Most people wait until the end of the year,” Mitchell said. “We believe that you should be most proactive to harvest the loss when the market dictates, not the calendar. This should result in some tax savings.

Understand the Market Will Rise Again

The most important thing to remember is that what goes down, eventually goes up again.

“We believe we may be entering into a new longer-term cycle that may allow value stocks to outperform growth. History shows as interest rates rise that tends to benefit reputable stocks with solid fundamentals, and a solid dividend,” Briggs said.

“Loss is uncomfortable, even if it’s temporary,” Molina pointed out. “But it’s important to remember that volatility is a normal part of investing, and you don’t actually lose any money unless you sell your investments for less than what you paid for them. History shows that markets tend to rise in the long run, which means if you stick to a diversified strategy and keep investing, you’re likely to come out ahead.”

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