A bear market can be a scary time for people heavily invested in the stock market, because much of the wealth in their portfolios might vanish. However, it provides opportunity as well as risk. If you are not heavily invested at the beginning of a bear market, it can create openings to build an effective and profitable portfolio. If you are patient, there is a chance of significant returns.
Profit Opportunity in a Bear Market
A bear market is a sustained decline in the stock market as a whole, or a lack of significant growth. Bear markets vary in length, but on average they last for a little over a year. Some begin and end in a very short period of time.
A bull market follows a bear market. The returns on stocks from the bottom of a bear market to the top of the next bull market can be substantial, and that is what makes buying stocks during a bear market such a lucrative prospect.
Buy Low, Sell High
One of the most fundamental aspects of investing is to buy low and sell high. If you manage not to be on the wrong end of a bear market, then you might have cash to invest when the market is declining. Some companies manage to survive and come out of a bear market strong, and can become profitable investments over time. Amazon.com survived the dotcom bubble bursting and the bear market that followed, and its stock went from less than $10 in 2001 to over $250 as of the date of publication. During a bear market you can buy more stocks for a lot less, and when the market does finally recover your returns are higher.
Finding Stocks to Buy
Try to avoid stocks in industries that are directly responsible for or impacted by a market downturn. For example if it is the tech industry that suffers, avoid companies in that industry. Even with good fundamentals, industry weakness eventually might catch up with a company. One exception: If there is fraud or gross mismanagement at one company and no hint of it in competitors, investing in the companies whose stock declines only by association might prove profitable. Rarely, however, will one company trigger a widespread bear market.
Vigilance Is Critical
Investing in a bear market is not less perilous than investing in any other market. The rewards are potentially greater, but the timing is critical. The stock market will not head downward and continue downward until it is done, and then start on an uptrend. It will oscillate up and down, but there will be one overall trend. To the extent possible, you want to invest when the market is as close to a bottom as possible, which is easier said than done. Then you want to ride the bull market close to the next peak, which is just as difficult to spot.
Nihar Patel covers finance and investing for several online publications, including Seeking Alpha. He also runs his own investment analysis website. Patel holds a J.D. from UC Hastings College of Law, as well as a bachelor's degree in political science and history from UC Davis.