Being in a bear market is difficult. It can be challenging to know what to do next, whether you’re new to investing or have been buying stocks for a while. And you might be considering your options, such as whether to increase your stock purchases, reduce your stock holdings, or just wait.
Although it’s unlikely that you would choose to sell equities during a stock market decline, it can be advantageous if the situation warrants it. The good news is that while it’s possible that you’ll lose money on your position, it’s not a given. Additionally, there may be tax advantages and investment gains.
If specific equities or asset classes see price drops of 20% or more, they may also enter a bear market. The good news is that bear markets rarely last more than 10 months on average, according to Hartford Funds.
Find out what to do in a bear market and why it may be advantageous for you to sell your assets during one by reading on.
What Exactly is a Bear Market?
A stock market loss of 20% or more is typically referred to as a bear market. Bear markets are challenging to predict or control. They initially appear to be a standard market slump, followed by a correction, and possibly some premature bargain-hunting.
Stock prices are already declining by the time the negative trend becomes undeniably clear, leaving those who haven’t reduced risk in their portfolios to question if doing so still makes sense or if doing so would only increase the cost of their failed market timing attempts.
Investors frequently monitor global indexes like the S&P 500 and the Dow Jones Industrial Average to determine when a bear market is about to start.
The S&P 500 fell 21 percent during the first half of 2022, marking the worst start to a year since 1970. After closing more than 20% below its high on Jan. 3, 2022, the S&P 500 entered a bear market on June 13, 2022.
Markets and investors have been on high alert ever since the declaration of a recession. The first half of 2022 has seen record high inflation, a mild cooling of the property market frenzied 2021, and the most ferocious rate increases in almost a decade.
Investors therefore probably have more time than they realize to react to the stock market’s declining fortunes, whether by adopting a carefully defensive portfolio stance or by making bets on further declines.
What to do in a Bear Market
Although they might be unsettling, bear markets often give investors opportunities. You can uncover possibilities to make profitable investments or, at the absolute least, keep the ones you already have if you know where to search. These tactics will aid you in navigating a bear market.
- Playing Defence
Ensuring your portfolio is adequately diversified across a range of asset types, not simply stock market sectors, is the first thing to do in a bear market. Diversification reduces volatility, which tends to rise during weak markets and can cause unsettling swings in investor portfolios.
- Hedging Risk
Investors have a number of instruments to choose from whether they want to reduce the risk associated with stocks or seize tactical opportunities during a bear market.
They consist of long-term Treasury bonds that will likely increase in value if a recession follows a bear market, as well as inverse ETFs, short bets on certain equities, and put options for profiting from sudden drops in stock prices.
- Use the Lipstick Effect to Your Advantage
The “lipstick effect” holds that during economic downturns, customers tend to spend more on small indulgences rather than luxuries. Cosmetic firms, in particular, benefit well during economic downturns, which many ascribe to the lipstick effect.
To diversify their portfolio during a bad market, investors should choose cosmetic companies that also pay dividends. During times of market instability, major players in the beauty business can give stability as well as dividends.
- Re-balance your portfolio
Reevaluating any growth companies or small-to-mid-cap stocks you have been holding onto is a good idea during bear markets. Certain growth stocks could be better left on the side because they lack the financial resources of their larger rivals, making them unable to handle market turmoil.
This is not to mean that you should immediately sell off all of your assets; in fact, a reevaluation would be advisable. Bear markets can be a fantastic time to buy growth stocks.
- Stay the course
After evaluating their holdings appropriately, the most crucial thing an investor can do during a bad market is to wait it out.
It’s difficult to listen to friends talk about selling everything off and see headlines blare all day long because it makes you more uneasy. Investing is a long-term game, and how you play it now will determine how well you do later.
Reasons to Sell Your Assets in a Bear Market
Why wouldn’t an investor steer clear of stocks altogether in the middle of a bear market, where more declines in stock prices are expected by definition?
Any investor may be tempted to sell their stocks in favor of cash or short-term government bonds during bear markets, which frequently result in panic selling.
Even while it might not be your first option, it is occasionally required. Let’s go over the several reasons why selling stocks during a bear market might be very wise.
- You Need the Money
Your stock portfolio is available for use if you need money to pay an unforeseen expense. Naturally, no investor wants to liquidate equities after they have lost value, but if you are not otherwise prepared, reality may force you to do so.
The decision may not be the best financial one, but it may be the only one that can be made.
- You Want to Minimize Taxes
Due to the significant looming capital gains taxes, individuals with substantial concentrated stock investments frequently hesitate to sell their shares. A bear market offers the chance to sell stock positions at lower gains, resulting in fewer tax liabilities.
- You want to reposition into index funds
When managing your money, maintaining a diversified portfolio is essential. The “company-specific” or “idiosyncratic” risk associated with individual stock positions has the potential to raise the volatility of a portfolio. Long-term higher volatility frequently results in inferior investment returns.
If you’re interested in index funds, bear markets offer both a logical exit from current investments and a wise entry for those adopting a long-term perspective.
It’s not advisable to take excessive risks during a bear market, nor is it generally the best time to do it. Bear markets can be terrible, but fortunately they are typically brief.
Even for experts, timing the market can be difficult, despite the fact that it might appear simple to sell during a bad market.
Naturally, it would be fantastic to be able to buy at the lowest price and sell at the highest one with absolute accuracy. Since this isn’t possible, we must make the most of what we have and choose the best course of action based on the variables we now have.
Even when triggered by a bear market, portfolio diversification and choosing stocks with robust, well-capitalized balance sheets above the hype can produce significant returns.