How to maximize your earnings despite market volatility.
As stock prices continue to sink, many investors are concerned about what that means for their portfolios.
The S&P 500 and the Nasdaq are officially in bear market territory after falling more than 20% from their peaks earlier this year, and nobody knows how long it will take for the market to recover.
Is it still worth it, then, to continue investing right now? And is it possible to make money even when we're in a bear market? It depends on your strategy.
Image source: Getty Images.
How not to invest during a bear market
During periods of volatility, it can be tempting to try to time the market -- or buy only when prices are at their lowest and sell when they reach their peaks.
In theory, this strategy makes sense. By investing when the market is at rock bottom, you can take advantage of those lower prices. Then when stock prices rebound, you can sell your investments for a hefty profit.
However, timing the market successfully is incredibly difficult, and it relies more on luck than skill in most cases. The stock market is unpredictable, and even the experts don't know exactly when prices will bottom out or how high they will get. If you buy or sell at the wrong moment, it could be costly.
Also, short-term investing outlooks can be riskier. Stocks that have the potential for short-term gains aren't always the healthiest investments overall, and there's a chance they may not recover from a market downturn. If you put a lot of money into short-term investments in the hopes of making a quick buck, you could lose more than you gain if those stocks fail.
A safer way to make money during periods of volatility
The good news is that it is possible to make money during a bear market, and it's easier than you might think. The key is to invest in strong companies and hold those stocks for the long term --regardless of what the market is doing.
Strong stocks from healthy companies are far more likely to recover from periods of volatility.That means no matter how far stock prices fall, you can rest easier knowing your investments have a good chance of bouncing back when the market inevitably recovers.
By holding your stocks for the long term, it also won't matter how many ups and downs the market experiences on its road to recovery. You don't need to predict how stock prices will fluctuate like you would if you were timing the market, because all that matters is that your investments see positive returns over time.
Historically, the market has seen positive long-term returns. In fact, in the last two decades alone, the S&P 500 is up more than 150%. That's despite several major downturns, including the dot-com meltdown, the Great Recession, the COVID-19 crash in 2020, and the current slump.
^SPX data by YCharts
While nobody knows exactly how the market will perform in the coming weeks or months, we do know that over the long run, it will experience positive average returns.
There are never any guarantees when it comes to the stock market. But by investing in quality stocks and holding your investments for the long term, it's far more likely you'll generate wealth despite all of the ups and downs along the way.
FAQs
Some markets, such as bonds, defensive stocks and certain commodities like gold often perform well in bearish downturns. If you have the risk appetite for it, bear markets may also be an opportunity to short-sell if trading, making a profit if you predict correctly when prices will fall (and make a loss if you don't)
How do you build wealth in a bear market? ›
Buy dividend stocks
Another way to hedge against bear markets is to invest in stocks that pay dividends over those that do not. Dividend-paying stocks usually outperform non-dividend-paying stocks — typically with less risk, according to 2022 research from Johnson Asset Management.
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Are millionaires made in bear markets? ›
And Millionaires Are Made in Bear Markets!
SO, as long as you stay focused on the long-term picture of continued growth and innovation – you'll be positioned to make a fortune.
How much cash should I have in a bear market? ›
While there is no one-size-fits-all number when it comes to how much cash investors should hold, financial advisors typically recommend having enough money to cover three to six months of expenses readily available.
What not to do in a bear market? ›
Avoid knee-jerk reactions.
By selling when the market has fallen steeply, you're at risk of locking in a permanent loss of capital. To optimize your potential over the long term, what's crucial is time in the market, not market timing.
What is the longest bear market in history? ›
The longest bear market lingered for three years, from 1946 to 1949. Taking the past 12 bear markets into consideration, the average length of a bear market is about 14 months. How bad has the average bear been? The shallowest bear market loss took place in 1990, when the S&P 500 lost around 20%.
What is a good investment in a bear market? ›
Government bonds and defensive stocks historically perform better during a bear market. However, most people investing for the long term shouldn't be aggressively tweaking portfolios every time there is a sell-off.
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The Motley Fool has positions in and recommends Alphabet, Amazon, Chewy, Fiverr International, Fortinet, Nvidia, PayPal, Salesforce, and Uber Technologies. The Motley Fool recommends the following options: short June 2024 $67.50 calls on PayPal.
Adding to winning stocks can amplify gains. The Motley Fool advises holding onto winning stocks, as they often continue to outperform in the long run. "Double down buy alerts" from The Motley Fool signal strong confidence in a stock, urging investors to increase their holdings.
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The Ultimate Portfolio is a carefully curated model portfolio created by Motley Fool's expert analysts. Its purpose is to offer a strategic roadmap that can lead to long-term investment success.
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When you jump into a plunging market, you must be willing to embrace the likelihood of further losses before you may see potentially greater returns when the bear finally yields to the bull. It's a hard pill to swallow, and many investors just can't do it. As a result, they can miss out on the opportunity to buy low.
Is it worth investing in bear market? ›
When might it be a good idea to invest in a bear market? "If your financial plan calls for a time horizon greater than a few years for the funds, and you aren't carrying debt with a high rate of interest," Bailey says. If you're itching to make a move, a bear market can be a great time to diversify your portfolio.
How long will the bear market last? ›
These charts of bear and bull markets in the S&P 500 since 1932 illustrate this well—there have 12 bear markets compared to 14 bull markets, but the duration of the bear markets is much, much shorter: The bear markets are just 25 months (around 2 years) long in average, compared to an average length of 59 months ( ...
Should I sell my stocks in a bear market? ›
Invest in stocks that you want to own for the long run, and don't sell them simply because their prices went down in a bear market. Focus on quality: When bear markets hit, it's true that companies often go out of business.
