How to prepare for a bear market
It’s not as hard as you might think.
How to invest in a bear market
This last point about how to prepare for a bear market is key because investors who are worried about their portfolio losing value will often try to time the market in an attempt to avoid the “bear.” But this can be a big mistake because by being out of the market – even a bear market – you risk missing some of the strongest up days.
In fact, Bank of America recently summarized stock market data going back to 1930 and found that if investors were out of the market for just 10 of the best days each decade, their total return would be significantly lower than investors who stayed fully invested.
The other problem with trying to time the stock market is that once you get out, how will you know when to get back in? Think of all the investors who sold near the bottom of the Covid-19 crisis, or the financial crisis, who never got back in the market – and missed out on any gains.
The truth is, one of the ways to help prepare for a bear market is to have a diversified portfolio, one that owns a wide variety of investments and asset classes, and then rebalance that portfolio as needed.
This is because markets move in cycles, which means certain sectors can be rising while others are falling. The same dynamic applies to different asset classes. A well-diversified portfolio owns “all the market, all the time,” and when you actively rebalance that portfolio, you sell some of the assets that are currently overperforming and use the proceeds to buy other assets that are currently underperforming in hope of their next upcycle.
Even though your portfolio may fluctuate in the short term during a bear market, investing in a diversified portfolio with a long-term approach may help minimize volatility and can help you stay on track to meet your financial goals. If you’re looking for independent financial advice about how your portfolio is diversified to prepare for a bear market, contact an Edelman Financial Engines advisor.
Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.