5 Genius Bear Market Investing Strategies | The Motley Fool (2024)

It's been a rough start to the year for new and tenured investors. After hitting record closing highs in early January, both the benchmark S&P 500 (^GSPC -0.65%) and iconic Dow Jones Industrial Average dipped into official correction territory (i.e., declines of at least 10% from their highs) in March. Worse yet, the growth-focused Nasdaq Composite fell into a bear market between mid-November and mid-March with a 22% drop.

Although bear markets are a natural part of the investing cycle, they can still be scary for a variety of reasons. For instance, the velocity of downside moves in the stock market often dwarfs upside moves -- when the market begins falling, it tends to do so really fast, whereas moves higher are more gradual. Additionally, it's impossible to know ahead of time when a bear market will begin, how long it'll last, or how steep the ultimate decline will be.

5 Genius Bear Market Investing Strategies | The Motley Fool (1)

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Despite these unknowns, putting your money to work during bear markets can be an exceptionally smart move. What follows are five genius bear market investing strategies that have the potential to make you a lot richer.

1. Play the long game

The first strategy is arguably the most important: Relax and play the long game.

Stock market corrections and bear markets are a normal and inevitable part of the investing cycle. Since the beginning of 1950, the S&P 500 has endured 39 corrections of at least 10%. This works out to a double-digit decline, on average, every 1.85 years. Even though Wall Street doesn't follow averages, it gives you a good idea of how common double-digit percentage declines are.

However, the average stock market correction doesn't last very long. Out of the previous 38 corrections (I'm excluding the ongoing correction since we don't know how long it'll last), the average length was only 188.6 calendar days, or about six months. If we narrow it down to just the past 35 years, which is when computers became common on the trading floor and disseminating information to Main Street started to become easier, the average correction length drops to just 155.4 calendar days, or about five months. Comparatively, bull markets typically last for years, with every notable correction eventually erased by a bull market rally.

What's more, data from Crestmont Research shows the rolling 20-year average annual total returns for the S&P 500 between 1919 and 2021 have never been negative. What this means is if you bought an S&P 500-tracking index at any point between 1900 and 2002 and held on for 20 years, you made money. In fact, only two of the 103 end years examined produced an average annual total return, including dividends, of less than 5%. This compares to more than 40 end years where your average annual total return was 10% or higher.

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2. Dollar-cost average into your favorite stocks

A second genius way to invest in a bear market is to dollar-cost average into your favorite stocks.

As noted, it's impossible to know ahead of time when a bear market will occur, how long it'll last, or how steep the decline will be. But every correction is eventually wiped away by a bull market rally. As long as you're invested for the long haul, this makes bear markets and double-digit percentage corrections the perfect opportunity to put your money to work.

Dollar-cost averaging is a way to take part of the emotional aspect out of investing and put money to work in your favorite stocks at either regular intervals, regardless of price, or perhaps at specific share price points. Edging into the stocks you like over time can allow you to build up a position without the regret of feeling like you bought in too early or at a disadvantageous price.

Another reason dollar-cost averaging is such a smart strategy is because the major indexes tend to increase in value over time. If you took the above data from Crestmont Research to heart and put dollar-cost averaging into action, you'll have a really good chance to build wealth over time.

3. Consider basic necessity/defensive stocks

If you're looking for an even more specific bear market investing strategy, buying stocks that provide a basic necessity good or service, or operate in defensive sectors or industries, is typically a smart move.

As an example, electric utility stock NextEra Energy (NEE 0.91%) has delivered a positive total return, including dividends, in 19 of the past 20 years. Electricity is a basic necessity service, and demand for electricity doesn't change much from one year to the next. This allows the company to accurately forecast its operating cash flow every year, which comes in handy with regard to outlaying capital for new infrastructure projects and/or acquisitions. If the stock market moves lower, NextEra's operating performance shouldn't be affected.

Another good example is healthcare conglomerate Johnson & Johnson (JNJ -0.65%). Since people can't control when they get sick or what ailment(s) they'll develop, there'll always be steady demand for prescription medicine, medical devices, healthcare products and services. People don't simply stop getting sick or needing care because of a bear market, which is why J&J is able to grow its adjusted earnings nearly every year.

As an added bonus, Johnson & Johnson is also one of just two publicly traded companies bestowed with a AAA credit rating from Standard & Poor's (S&P). It's the highest credit rating S&P doles out, and is one notch higher than the U.S. federal government (AA). Put another way, S&P has more faith in J&J making good on its debt than it does in the U.S. government repaying its outstanding debts.

5 Genius Bear Market Investing Strategies | The Motley Fool (4)

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4. Focus on growth stocks

If you love investing in growth stocks, you've enjoyed quite the run over the past 13 years. Growth stocks have run circles around value stocks since the end of the Great Recession, with historically low lending rates paving the way for fast-paced companies to hire, acquire, and innovate.

But did you also know that growth stocks have a penchant for outperforming during a weakening or contracting economy?

Six years ago, Bank of America/Merrill Lynch released a report that examined the performance of growth stocks versus value stocks over a 90-year stretch (1926-2015). Over the full 90 years, value stocks outperformed growth stocks with an average annual gain of 17% versus 12.6%. But during periods of weakness, growth stocks were the clear better performer. Even though interest rates are beginning to rise, lending rates are still well below historic norms and advantageous for fast-growing businesses.

For instance, Meta Platforms (META -1.57%), the company that owns popular social media assets Facebook, Instagram, WhatsApp, and Facebook Messenger, has delivered double-digit annual sales growth looking back as far as the eye can see. This includes during the height of the pandemic in 2020, when Meta generated 22% year-over-year sales growth from its predominantly ad-driven operating model.Advertisers know that Meta gives them the best chance of any social media platform to reach the largest number of eyeballs, which is what makes it such a no-brainer buy in a bear market.

5 Genius Bear Market Investing Strategies | The Motley Fool (5)

Image source: Getty Images.

5. Buy dividend stocks

The fifth and final genius bear market investing strategy is to consider buying dividend stocks.

Back in 2013, J.P. Morgan Asset Management, a division of money-center bank JPMorgan Chase, issued a report that compared the performance of dividend-paying companies to those that didn't pay a dividend over a four-decade period (1972-2012). Not surprisingly, the dividend stocks mopped the floor with the non-dividend payers. Over 40 years, income stocks averaged a 9.5% annual return, compared to a meager 1.6% average annual return for stocks that didn't pay a dividend.

Though the magnitude of this outperformance might be a bit shocking, the end result isn't. Businesses that pay a dividend are often profitable on a recurring basis, time-tested, and have transparent long-term growth outlooks. They're exactly the type of companies that should increase in value over the long run, and that investors shouldn't have to worry about during a bear market.

Take tobacco stock Philip Morris International (PM 0.34%) as a good example. Although tobacco isn't the growth story it once was, tobacco stocks like Philip Morris continue to deliver for their shareholders. Since its spinoff from Altria Group 14 years ago, Philip Morris' shares are up a cool 100%. But if you add in the company's juicy dividend, the total return rockets higher to 284%.

What's more, Philip Morris has incredible pricing power and a presence in more than 180 countries worldwide. A bear market pullback isn't going to inhibit its ability to market tobacco and heated tobacco products to consumers.

Buying and owning dividend stocks can be your golden ticket to riches during a bear market.

JPMorgan Chase and Bank of America are advertising partners of The Ascent, a Motley Fool company. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Sean Williams owns Bank of America and Meta Platforms, Inc. The Motley Fool owns and recommends Meta Platforms, Inc. and NextEra Energy. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

5 Genius Bear Market Investing Strategies | The Motley Fool (2024)

FAQs

What are the 5 stocks recommended by Motley Fool? ›

The Motley Fool has positions in and recommends Enbridge, Home Depot, Target, Tesla, The Trade Desk, Visa, and Walmart. The Motley Fool recommends Dominion Energy.

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The Motley Fool has positions in and recommends Alphabet, Amazon, Chewy, Fiverr International, Nvidia, PayPal, Salesforce, and Uber Technologies. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal.

What is the best investment during a bear market? ›

Bonds — Bonds typically provide lower rates of returns than stocks on average but are usually less volatile and safer. Investing in bonds may help hedge your portfolio against the ups and downs of the stock market. Cash — This can include savings deposits, certificates of deposit and money market accounts.

What is the Motley Fool investing style? ›

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What is the rule of 72 Motley Fool? ›

Let's say that you start with the time frame in mind, hoping an investment will double in value over the next 10 years. Applying the Rule of 72, you simply divide 72 by 10. This says the investment will need to go up 7.2% annually to double in 10 years. You could also start with your expected rate of return in mind.

What are Motley Fool's double down stocks? ›

"Double down buy alerts" from The Motley Fool signal strong confidence in a stock, urging investors to increase their holdings.

What stock will boom in 2024? ›

Best S&P 500 stocks as of August 2024
Company and ticker symbolPerformance in 2024
General Electric (GE)66.9%
Constellation Energy (CEG)62.4%
Targa Resources (TRGP)55.7%
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What is the number 1 ETF to buy? ›

Top U.S. market-cap index ETFs
Fund (ticker)YTD performanceExpense ratio
Vanguard S&P 500 ETF (VOO)14.8 percent0.03 percent
SPDR S&P 500 ETF Trust (SPY)14.8 percent0.095 percent
iShares Core S&P 500 ETF (IVV)14.8 percent0.03 percent
Invesco QQQ Trust (QQQ)12.1 percent0.20 percent

What is the most profitable stock in 5 years? ›

Best Performing Stocks Over the Last 5 Years
TickerCompany Name
1SMCISuper Micro Computer
2CELHCelsius Holdings
3NVDANvidia
4AVGOBroadcom
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5 days ago

What not to do in a bear market? ›

Selling off all your stocks after seeing red in your portfolio during a bear market is the last thing you want to do. Volatility is scary, especially if you are risk averse, but running with the volatility wave is key and beneficial to the success of your long-term portfolio.

How do you profit from a bear market? ›

But you can maximise your chances of a profit in a bear market by following bearish-friendly strategies. These include diversifying your holdings, focusing on the long-term, taking a short-selling position, trading in 'safe haven' assets and buying at the bottom. Can you lose money during a bear market?

How much cash should I have in a bear market? ›

However, a general rule of thumb suggested by U.S. Bank is that your cash or cash equivalents should range from 2% to 10% of your portfolio, although the right answer for you still depends on your circ*mstances.

What is the 4 rule Motley Fool? ›

The 4% rule assumes your investment portfolio contains about 60% stocks and 40% bonds. It also assumes you'll keep your spending level throughout retirement.

What are the 10 stocks The Motley Fool recommends? ›

The Motley Fool has positions in and recommends Alphabet, Amazon, Chewy, Fiverr International, Fortinet, Nvidia, PayPal, Salesforce, and Uber Technologies.

What is better than Motley Fool? ›

The best stock advice websites include Motley Fool Stock Advisor, Seeking Alpha, and Moby. These platforms offer in-depth stock analysis and investing research to help you make informed decisions.

What are the 5 best stocks to buy now? ›

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Company (ticker)Analysts' consensus recommendation scoreAnalysts' consensus recommendation
ServiceNow (NOW)1.49Strong Buy
Assurant (AIZ)1.50Strong Buy
Howmet Aerospace (HWM)1.50Strong Buy
Insulet (PODD)1.50Strong Buy
21 more rows

What are the 5 most popular stocks? ›

Most Popular Stocks List
CompanyPriceProfitability
Amazon.com Inc AMZN Loading...161.02 USD -4.1%53/100
NVIDIA Corp NVDA Loading...100.45 USD -6.36%97/100
Microsoft Corp MSFT Loading...395.15 USD -3.27%78/100
Pfizer Inc PFE Loading...29.74 USD -2.27%57/100
28 more rows

Which stock will explode in 2024? ›

2024's 10 Best-Performing Stocks
Stock2024 Return Through July 31
Janux Therapeutics Inc. (JANX)278.3%
Summit Therapeutics Inc. (SMMT)313.7%
Avidity Biosciences Inc. (RNA)403.6%
Longboard Pharmaceuticals Inc. (LBPH)451.2%
6 more rows

What are 5 star stocks? ›

Five-star stocks, should offer an investor a return that's higher than the company's cost of equity. Low-rated stocks have significantly lower expected returns. Three-star stocks are those that should offer a "fair return," one that adequately compensates for the riskiness of the stock.

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