For retail investors, it’s currently a scary time. Stock markets in early 2020 have been more volatile than at any time since the Great Depression of the 1930s. The steep drop in stock prices since the end of February ended the longest bull run in U.S. history. It also moved investors into a bear market, which is defined as a drop of 20% or greater in benchmark indexes. Some forecasters say that the worst may still be ahead.
So how should you invest in a volatile bear market? Whether it’s the 2020 crash or the next major market hit that comes along, there are steps you can take. Here are five strategies to protect your investments and ensure your money continues to work for you during times of depressed prices and uncertainty.
Look For Bargain Stock Prices
Warren Buffett, the most successful investor of all-time, famously advises that you “be greedy when others are fearful.” That means you should see market downturns as an opportunity to buy stocks at discounted prices. Depressed prices present bargains for opportunistic investors. In any bear market, you should look to go hunting. Stocks are on sale!
In the current downturn, many industries and sectors have seen their stock prices hammered. Some of them have been reduced to their cheapest prices in more than a decade. This includes airline, restaurants, and bank stocks. The underlying fundamentals of many of these companies are perfectly fine, though. Their share price is only depressed because of the economic impact of a global quarantine.
Once economies around the world reopen, these stock prices are surely to rise again. That means that right now is a good time to buy low, in anticipation of selling high at a later date. Rather than fret that your portfolio has taken a hit in recent months, focus instead on bargain prices and future growth potential.
Invest Gradually, But Steadily
When stock markets are on a rollercoaster ride from extreme highs to extreme lows, you’ll want to be careful. It’s important to exercise some degree of caution when putting your money to work. While you should search for bargain stock prices, don’t storm into the market and invest your money all at once. It could be a disaster. Instead, you should invest gradually but steadily. You should buy some shares in a company, but hold some of your money back. Just wait a bit to see what happens. If the price falls further, consider buying some more.
Similarly, if you feel the stock market has further to fall before hitting bottom, hold onto some cash. Just be patient. Wait to see where the market moves. Try to avoid rushing back into the market on days when the indexes are on an upswing.
Remember the aim is to try and get the best price possible when you buy. This will require a degree of patience on your part. A slow and steady pace of investing your money is the best strategy during a bear market. This approach will also help your dollar cost average, which is the average price you purchased a given stock over time.
Diversify Your Investments
You should diversify your assets even at the best of times. However, it’s even more important to do it during a bear market. Yes, you should hold some fixed income such as bonds. But you should also be diversified among the stocks you hold. Don’t put all your money into one company or sector, such as Apple or only technology stocks. Make sure you have a good mix of stocks across a broad range of economic sectors. Invest in banks, bio-pharmaceutical companies, technology, and grocery store chains, for example.
Another great way to diversify is to invest in an Exchange Traded Fund (ETF) that tracks a particular stock index such as the S&P 500. This will give you access to hundreds of different companies that are traded on the exchange. Some commodities (like gold) are known as “safe haven” investments during a market downturn of correction. The key is to not put all your eggs into one basket.
If you’re diversified properly, then some of your investments are likely to increase in value, while others fall. For example, your technology stocks might be rising, as your bank stocks stagnate or fall. The more diversified you are the less likely you will be to see your portfolio plunge into the red during a bear market.
Use Stop Loss Orders
One of the best ways to protect your investments during a bear market is to use stop loss orders. These guarantee that you will sell your particular holdings if they fall to a certain level. Not only can stop loss orders prevent you from losing money, they can also be used to lock-in profits.
For example, say you bought shares in Microsoft when they were at $255 each. The price runs up to $275 per share. You place a stop loss order at $270 a share. This means that if the share price falls to $270, you will automatically sell. You’ve locked in a profit of $15 per share. You’ve also made sure to sell before you hit a negative return.
Using stop loss orders is critically important during times of market ups-and-downs. Stop loss orders also provide you some peace of mind, knowing that you don’t have to constantly be monitoring your investments. If the price of a stock you’re invested falls to a certain price, you will simply sell, liquidating your position. When done properly, you’ll either realize gains or prevent steep losses. It’s an invaluable tool during a bear market.
Stay Current and Be Watchful
While you shouldn’t have to watch your stock portfolio around the clock, it’s still advisable that do-it-yourself investors pay attention to what is happening in the markets. Make sure you are watchful during a bear market or other times of extreme volatility. You’ll want to know, for example, when oil prices collapse further. This can send the whole market downward.
On the other hand when some U.S. states announce that they are gradually reopening their economies, it might give stocks a boost. When bad news erupts overseas in places like Russia or China, it can send investors running for the exists. Paying close attention and being aware of what is happening during a market downturn will provide you with the information you need to make smart moves with your investments.
Knowledge is power. It’s true during good times, but downright essential during bad times. Be sure to set alerts on your computer or smartphone. Check the markets at least a couple times a day. Make sure you know what is happening so that you can react appropriately.
The Last Word
It’s an unsettling time for investors all over the world right now. However, this market recession will come and go, like all others that came before it. Bear markets can be stressful. They are known to cause fear and paralysis among both professional and retail investors alike.
However, by using common sense and a few tools at your disposal — and keeping you head about you — it’s possible to defend your investment portfolio. You can even grow it during a market downturn, if you’re savvy enough. When in doubt, just hold onto your cash. Wait for good opportunities. A little patience and a firm view of your long-term goals can be a big help in times of drama and uncertainty.