How to buy stocks during a bear market
The US market ended the first half of the year in bear market territory, with the S&P 500 down by 21 percent from its 52-week high and the Nasdaq lower by 31 percent.
Although the Philippines’ PSEi index performed better, neither is it in a bullish state as the local economy is also suffering from high inflation, rising interest rates and a weak peso. As such, it won’t be surprising if the Philippine market eventually enters bear market territory, especially if the US market continues to go down.
Although bear markets are frightening, they provide investors a rare opportunity to make a lot of money. This is because valuations of stocks, including those of well-run blue-chips, only become cheap during difficult times.
When the economy and the stock market eventually recover, stocks will trade at much higher prices as valuations normalize. Only investors who were brave enough to buy them during difficult times will make a lot of money.
Admittedly, buying stocks during bear markets is easier said than done. The abundance of bad news and the market’s volatility will make you question whether you made the right decision. Bear markets can also last for a very long time, with some lasting for years, making even the most patient investor feel hopeless and give up.
However, there are ways to mitigate these risks, making the process of investing during bear markets easier for investors.
The first thing you should do when buying stocks during bear markets is to lengthen your investment time horizon. As mentioned earlier, it takes time for stocks to recover from bear markets, so you might get frustrated if your goal is to make money right away. Nevertheless, remind yourself that the significant returns are worth the wait, as it isn’t uncommon for investors who buy stocks during bear markets to more than double their money.
Since you need to hold your stocks for a long time, limit the size of your investment and only use money you know you will not need right away. This will allow you to avoid the risk of selling your stocks at a loss, before the economy and the stock market recovers, just because you need to raise cash to pay for an immediate need like the amortization of your house or your children’s tuition fee.
When buying stocks during bear markets, stick to blue chip stocks that don’t have a lot of debts. Underleveraged companies don’t only have a stronger chance of surviving the crisis, but they can also take advantage of opportunities to buy distressed assets and grow their market share, making them even stronger when the economy turns around.
Another reason why you should buy blue chips instead of smaller cap stocks is because blue chip stocks go up first during market recoveries being top of mind among investors.
To help increase your patience as an investor, you can also buy dividend-paying stocks. That way, you will receive a small income while waiting for prices to recover.
Finally, buy stocks slowly. It is not unusual for investors to initially suffer from losses when buying stocks during bear markets given that prices are on a downtrend. Moreover, nobody knows when prices will bottom. Buying stocks slowly will allow you to reduce your average cost, helping you become profitable faster when the market recovers.
With these tips, I hope that you will be in a better position to buy stocks during these difficult times, allowing you to make a lot of money when the economy and the stock market eventually recover. INQ
