What you need to know about investing in bear markets

The term “bear market” doesn’t give off the best vibes. Plummeting prices. Charts with zigzag lines down. Well, grizzlies themselves aren’t exactly cute and cuddly.

But the fear surrounding bear markets is not always justified. Sure, bears can be tough to fight, but they can also provide tremendous investment opportunities. You just have to know what you’re doing, which is why we’ve teamed up with The Motley Fool to highlight the ins and outs of investing in these ~turbulent times~.

Collapsing prices. Downward trends. Sell ​​assets en masse. All are signs of a bear market. The real definition, however, applies when stock prices continuously fall by 20% or more for at least two months.

But even when it feels like you’re deep in the bears’ den, there’s light at the end of the tunnel: bear markets actually tend to only last a year on average…a lot shorter than the typical bull market (the opposite of a bear, where prices tend to rise), which lasts 7 years. And once stats like unemployment and interest rates start showing a few months of positive signs, investors will start putting money back into stocks, which usually resolves a bear market. Read on for three ways to come out strong.

This process involves making regular contributions to your portfolio rather than, say, buying armfuls of cheap stocks in the hope of making quick gains. Averaging can be a solid strategy for investing in bear markets because it helps protect investors against market swings and sudden drops.

Here’s how: Create a spreadsheet that details your monthly expenses, from rent to groceries to retirement savings. Next, factor the costs of your financial goals into your monthly expenses and determine a fixed dollar amount that you can invest on a regular basis (ideally, with each paycheck). Oh, and one more thing: keep some cash, if you can, to spend on opportunistic purchases. You never know when the bear will start to wake up and feel bullish.

You’re reading an article on bear markets, so it’s safe to assume you know about diversification. But why is it so important, especially in a downturn? Spread your investments not only across different types of assets (bonds, mutual funds, derivatives, etc.), but also a wide range of companies and industries is a proven way to help mitigate risk and reduce price volatility.

See how this could be useful in a bear market? As the storms of a choppy market rage, some industries face stronger headwinds than others. If you put all your eggs in one basket, a bear will find them. To diversify. To diversify. To diversify.

Easier said than done, of course. But there are plenty of ways to get the tea on your investment prospects. Look for profitable, cash-generating companies with strong balance sheets, to start with. Focus on the companies themselves and their results, not just their stock prices. Bear markets with exorbitant interest rates (like the one we’re in right now) can disproportionately hit cash-burning companies, but they can also drag down very healthy companies, giving investors the opportunity to pick up big stocks at discounted prices. By properly examining a company’s financial health (cash flow, income statement, debt, etc.), you can avoid getting caught in the den and stabilize your portfolio.

A bear market always makes the palms of everyone sweat, from child financial prodigies to newcomers buying their first stocks. But it doesn’t always have to be a bear. By creating financial goals, diversifying your portfolio, and choosing to invest in cash-generating businesses, you can weather the storm and start making money.