Investing in a Bear Market

One question that many people new to trading ask is: can a diversified portfolio save me from a bear market? To rephrase this in another way, can I still make money while others are losing it?

The answer is yes, but with some strong caveats. For one, you can’t make money doing the same thing that everyone else is doing while they are continuing to lose money. It makes sense when you see it like this, but so many people do not take this simple fact into account. When you apply this to investing over the long term, that becomes difficult to do. Most successful investors have a similar long term strategy: find an ETF, mutual fund, or set of individually picked stocks that mirror the S&P 500, and then hold them for a long time. If you are doing this while the S&P is going down, guess what? You’re going to lose money.

Now, before we go any further, remember that although you will lose money over the short term, you will most likely gain over the long. The S&P has a long and storied reputation for consistent upward movement. It returns around 3 percent per year, on average, and there’s no reason to believe that this will change in the near future. Yes, there might be a few down years–maybe even right in a row–but 50 years from now, you will probably be able to look back and say, “I made 3 percent per year on average for each of those 50 years.”

If this is okay with you, then by all means, invest like everyone else. You’ll have good years and bad years, but over time, it will all even out. If you keep putting money in on a regular basis, you will feel the sting even less because of the dollar cost averaging effect. That’s good, and it will help you save money for retirement. Still, this doesn’t answer the immediate question: what about right now? What if there’s a bear market right now?

If that’s the case, then you will more than likely lose money–for now. You do not have to, though. Taking a different approach can help prevent this, as long as you are willing to utilize a different approach. You can sell stocks short, you can invest in other markets that are in a bull swing, you can short term trade stocks, or you can short term trade other assets, like currencies. You can also use alternative types of trading, like binary options, where there is no change of ownership or implied ownership. They take time to learn and master, but once you do, that 3 percent per year average will become a much bigger number. These methods open up many new doors to you, and each of them can create more wealth than buying and holding a losing fund.

Although the market’s going up right now, there’s a strong possibility that this will change soon. There are too many factors, both domestically and internationally, that indicate a bear market is inevitable. It might not happen in the next few weeks or months, but growth seems like it is beginning to reach a top. When this happens, putting money into a fund when it’s at its top is counterintuitive. It is the exact opposite of buy low, sell high. Instead, you can make your money go further just by varying how you approach investing. Even with the dollar cost average phenomenon, you are cutting yourself short by doing things this way. And you are doing it for no reason other than that is what you have always done.