7 Top Tips When Investing in a Bear Market

January 20, 2023

Investors are going through tough times right now. Last year was a miserable year for investors.

In the US, the Dow Jones Industrial Average (DJI), S&P 500 Index and NASDAQ Composite fell by 9%, 19% and 33% respectively.

What’s worse is that all three benchmark indices fell into a bear market.

While the Singapore stock market has done relatively well compared to the rest of the world, there is still a risk of a bear market in the event of a global recession this year.

A “bear market” refers to a widespread decline in asset prices by at least 20% from recent highs and is a normal part of the investing cycle.

However, with the initial recovery we saw at the beginning of this year, one must wonder if it is a bull trap or if the worst really is behind us.

While we do not have a crystal ball to see where the market goes in the short term, here are seven top tips for anyone looking to invest in a bear market.

1. Don’t let emotions cloud your judgement

Investors need to always separate their emotions from their investment decision-making process.

It is important that investors do not become too greedy by chasing after the highs in the stock market or, at the other extreme, become too afraid to see the opportunities in the market.

In fact, putting your money to work during a bear market is often a smart move in the long term.

What is more important is to focus on high-quality stocks and investments during a bear market.

2. Buy via dollar cost averaging

In a bear market, long-term investors can take advantage of the market weakness and use dollar-cost averaging (DCA) to their advantage.

By purchasing shares periodically, you will end up buying shares at a low entry price when the market is down.

Over the long term, your cost will have been averaged down during the bear market, allowing you to experience the potential gains when the market recovers.

What is crucial, though, is ensuring you buy into a selection of stocks that have a strong track record and responsible management over the years.

3. Consider money market funds

While money market funds do not provide good returns, it is important especially during a bear market.

A money market fund is a type of mutual fund that invests in liquid assets such as cash, cash equivalents and high-rated debt securities.

Among some of these are bank certificate of deposits (CDs), high grade commercial paper (CP) or government treasury bills, also known as T-bills.

In Singapore, investors can also consider Singapore Savings Bonds (SSBs), which offer a safe and reliable way to earn passive income.

Another one is Singapore’s Treasury bill, which currently offers a yield of around 4.2%.

By doing this, you will put your money to work and earn a relatively decent yield without too much risk.

4. Buy recession-proof stocks

In a bear market, one of the key strategies is to invest in companies that are deemed as “recession-proof” due to the nature of their businesses.

Among some of those are companies in the consumer staples or healthcare industries.

Usually, consumer staples such as food, drugs, hygiene products and medical supplies are deemed as necessities and are the last items to be cut from a household’s budget.

This is why some of these companies in the consumer staples sectors are called “defensive” since they are resilient – even in an economic slowdown.

I have previously written about my 3 top recession-proof Singapore stocks to buy this year.

5. Buy Singapore REITs

For investors with exposure to Singapore, I believe the Singapore REITs (S-REITs) market provides a level of defense in a bear market, given their focus on paying out dividends.

While S-REITs have seen a sharp decline over the last year amid a sharp increase in interest rates, there are 5 key reasons why I think investors should invest in S-REITs this year, regardless of whether we endure a bear market or not.

With an attractive distribution yield, S-REITs will also help to stabilise investors’ portfolios in a bear market.

Here are the top 5 REITs that I wrote as having potential to benefit from China’s reopening.

6. Invest only what you can afford

Investing is important but in life you have other needs, such as eating and having a place to stay.

I always believe that investors should not invest unless they are ready to hold onto their investments for at least five years.

Why five years? This is because, historically, the average bear market has lasted for slightly more than a year.

Meanwhile, the longest bear market occurred in the wake of the dot-com bubble that burst in the early 2000s, lasting for a total of 929 days.

However, it will still take time for the market to recover to its level prior to the crash.

This is why the key is; only invest money that you can afford to do without for the next five years.

7. Sell covered calls to earn income

I shared about using covered calls last year as a great income strategy in a bear market.

With this strategy, it allows you to earn an income while the stock market is trending downwards.

It allows long-term investors, who own shares of companies with strong fundamentals, to take advantage of the market weakness to earn premiums from selling call options on stocks that they own.

Keep investing…even in a bear market

It is a terrifying feeling in a bear market but by following these seven steps, it’ll allow you to make rational decisions whether you want to go defensive or take on a bit more risk.

At the end of the day, investors need to remember that the stock market tends to go up over the long run as the economy eventually recovers and returns to growth.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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