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Despite a rally in October, the bear market continues to pressure investors. Many young investors have never experienced a prolonged bear market, and even older investors may feel uneasy as their portfolios are likely quite a bit less valuable at this point.
But a bear market presents several opportunities. Opportunities to look inward as an investor, as well as opportunities to seek out new investments. Here are three things you can do today to make the most of the bear market.
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1. Reassess your risk tolerance
It’s easy to feel comfortable allocating 100% of your portfolio to growth stocks in a bull market. But you might not feel great when the bears come in and your portfolio gets wrecked.
A bear market is the best time to assess your risk tolerance. Humans are naturally loss averse. That is, they feel the pain of a loss much more than the happiness from a gain of equal size. The best time to determine how much volatility you can really tolerate is when your stocks are losing value.
On the other hand, you may find that you can easily digest the losses in your portfolio. You may want to increase exposure to riskier assets, which could provide greater upside in the long run.
If you’re a bit stressed about your investments right now, that’s perfectly normal. But if you’re stressed to the point where you want to abandon ship, sell everything, and hide under a rock, you’re probably taking too much risk with your portfolio.
2. Continue to put cash to work
One of the big causes of the sell-off in stocks and bonds recently is the high inflation rates we’re currently experiencing and the Fed’s decision to raise interest rates to fight it.
High inflation means any extra cash you have on the sidelines is getting hit nearly as hard as stocks and bonds. That said, the future expected real returns for cash aren’t very good either, especially compared to stocks and bonds.
While cash may seem like a safe haven nowadays, its buying power is getting destroyed month after month.
If you’re still young with a long investment horizon, you could invest in stocks. Few asset classes offer better inflation-adjusted returns over the long run than stocks. If you’re simply looking to preserve the buying power of your cash, you could buy Series I savings bonds or TIPS, which will help your money keep up with inflation.
Holding a lot of cash right now without any use for it isn’t going to help combat the effects of the bear market.
3. Seek out opportunities for exceptional market returns
Bear markets can produce some big opportunities to invest in stocks that have dropped significantly in price. In fact, even if you simply buy an S&P 500 index fund, the odds are good that you’ll produce better-than-average returns by investing right after the market falls 20%.
Stocks fall in price because the market demands better future returns from stocks. To produce a better future return, a stock’s price must come down.
Currently, the market is demanding better returns from stocks because of inflation and the Fed’s decision to raise interest rates. If you can get 4% from a Treasury bill, you should be able to get a much better return from risking your money with stocks.
That’s to say, the market is purposefully creating great investment opportunities for people with the cash to put into the market to buy. Do some research, seek out those opportunities, and put your cash to work. Just remember to stay within your risk tolerance because there’s no guarantee the market won’t continue to decline, and there’s no telling when it will recover.
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