The Best Defense Against Bear Markets

bear market

Bear markets are the bane of every investor’s portfolio. They can strike quickly without much warning and turn a profitable year into a disaster. Panic sets in fast and the markets become a mad scramble to sell stocks before everyone else to avoid taking on even more losses.

There are few things in the markets scarier than watching the indexes drop more than a percent day after day. Bear markets bring with it large swings in volatility which can be disconcerting to even the staunchest investor. But with volatility comes profitable opportunities for those that have the ability to think differently. In many cases, not only are bear markets not something to be afraid of, but something to look forward to.

Combining offense and defense

Whether it’s a bull market or a bear market, each sector of the economy and its associated industries don’t all perform the same way at the same time. In other words, not every industry will be undergoing a bullish upswing or bearish reversal at any given moment. That means even in the midst of a harsh sell-off, there will still be attractive profitable industries investors can take advantage of.

Another way to look at a sell-off or bearish reversal is to view stocks as if they were having a sale. Some companies may be going on sale because they genuinely aren’t worth as much but far more often you’ll find that stocks are simply caught in the grip of bearish selling momentum that has nothing to do with the state of that particular business or even industry.

Savvy value investors like Warren Buffet thrive during bear markets because they’re making moves and buying quality stocks for far less than they could during a bull market. Once the smoke clears and the markets begin to recover, these stocks can produce returns far in excess of the S&P 500 average.

While opportunities can be found during bear markets, one of the best ways to prevent taking on larger-than-expected losses is to remain diversified. It can be tempting to sell some or even all of your holdings and wait on the sidelines for the danger to pass, but that can mean guaranteeing losses and missing out on the subsequent upside swing once the bear market reverses course.

Final considerations

Arguably, the best way to handle bear markets is to simply power through them. Historically, bear markets only last 18 months while bull market average 97 months. That means as long as you stay invested, it might be a better strategy to simply ride out downturns and let the stronger long-term trends define your gains. Having a long-term strategy means being able to weather market downturns with relative impunity.