All our investments make us look like Warren Buffet during a bull run, but what happens when the market inevitably turns south? Of course, it’s never a good idea to panic and sell your investments, but you should prepare yourself to navigate the stock market when stock prices fall. So where should your money be? Below are some bear market investment tips from financial experts.
Many new investors will hear the phrase “timing the market,” which means buying stocks at their lowest price and selling at their highest prices. The first piece of advice for any serious investor is to understand that neither you nor any other investor can accurately time the market.
Scot Johnson (CFA, Principal & Chief Investment Officer) of Adell, Harriman & Caprenter Inc. notes, “Investors, whether professional or part-time, would be wise not to think they can accurately and consistently predict the start or end of recessions and bear markets.”
Scot says bear markets are simply an inevitable part of the natural economic cycle. So instead of trying to time the market, investors should focus on “quality investing” from the get-go. By focusing on quality, investors build a sustainable portfolio that can withstand economic downturns.
In addition, Scot adds: “We can apply a quality filter to any economic sector of the stock market. When looking for quality, we look for consistent profitability first. We’re also looking for what we call ‘high-quality revenue’, where revenues and the cash flows they produce are fairly closely matched.”
Finding shareholder-friendly companies is part of the Scottish investment strategy. Companies that regularly pay dividends and consistently increase their payouts fall into this category.
Another quality aspect is finding stocks that have embraced share buyback plans. By adopting these buyback plans, companies “offer management more flexibility in execution than a dividend commitment, but still benefit shareholders by buying back undervalued stock, returning excess cash to shareholders, and managing the number of shares outstanding.”
To further bolster a high-quality portfolio, Scot recommends investing in companies that provide “necessary” goods and services, as they tend to be more resilient during poor market conditions. Historically, the consumer staples, healthcare and utilities sectors have provided stability, as we cannot live without them regardless of market conditions.
Companies in these sectors are often among the more generous dividend payers. Despite their declining share prices, paying significant dividends makes investments in these companies even stronger and more attractive in difficult times.
Blaine Thiederman (MBA, CFP), founder and principal advisor at Progress Wealth Management, has a similar view on bear market investing.
“Everyone is looking for a magical place that recovers faster and is an optimal place to invest your money. The problem is, no one really knows for sure the best place to invest your money at any point in time. What’s really important is focusing on what we know for sure.”
Blaine points to rising interest rates and the conflict with Russia. The Fed is likely to raise interest rates soon, and the conflict that is currently terrifying some investors should be short-lived.
Therefore, he thinks it is likely that markets will recover and this year will end on a positive note.
Blaine states, “With every investor I work with, I make sure they stay focused and disciplined and don’t pay attention to this short-term correction, because objective logic (not luck) helps achieve our goals. If you invest in a less-than-diversified portfolio during a correction, you could mis-guess and regret this decision indefinitely.”
For this reason, Blaine recommends that his clients stick to a passive, indexed portfolio. He reiterates: “Because investment decisions, like our health-related decisions, must be objective, verifiable and demonstrable. Without it, our ability to achieve our financial goals in life is based on hope and a dream, and that is not good enough.”
For financial goals more than 3 years away, Blaine recommends a well-diversified and boring portfolio that uses low-cost index funds. For major purchases in less than three years from now, using a high-interest bank account that offers a deposit bonus is the safest place for your money.
For any investor, trying to time the market is likely to result in more failures than successes. Instead, the best way to prepare for adverse market conditions is to already invest in safe, solid, established companies and index funds. By being proactive rather than reactive, you can be confident that you can weather any economic storms.
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Jeff is a fan of all things finance. When he’s not changing the world with his blog, you can find him on a run, playing a Mets game, playing video games, or just playing with his kids.
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