How Millionaires Invest During a Bear Market: Learn What the Rich Do

champc / Getty Images/iStockphoto
champc / Getty Images/iStockphoto

We are in a bear market. A bear market is defined as one in which a broad market index (such as the S&P 500) declines by 20% or more over at least a two-month period. CBS News reported in mid-June that the S&P 500 had declined 21% since its January 2022 high.

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This situation comes amid inflation figures not seen in decades, seemingly never-ending supply chain crunches, and an ongoing war between Russia and Ukraine that is exacerbating all of these underlying issues. As a result, it is unclear when investors can expect a rebound in the stock market.

While the situation can be discouraging for investors, thinking like a millionaire means you aren’t phased by these temporary setbacks. Instead, you are able to think long-term and understand that things will inevitably improve. Here’s how millionaires invest during a bear market, even when things look grim.

Create a Winning Strategy and Stick to It

We all want to have a winning investment strategy, and that may occasionally lead you to reevaluate your strategy and optimize as needed. But too much optimizing can hurt you in more ways than one.

One way is that if you sell your investments too often, you could end up with a lot of capital gains. That could hurt your returns, even if your new-found investments outperform the old ones. Another problem is that chasing high returns could push you into increasingly speculative assets, which could result in high fees or very volatile returns.

Instead, it’s usually best to pick a winning strategy and stick to it. For example, you can create a simple three-fund portfolio:

  • 64% total U.S. stock market index fund

  • 16% international stock market index fund

  • 20% total bond market index fund.

This allocation is generally considered aggressive. If you opt for that strategy, it’s a good idea to increase your bond allocation over time. But other than that, making a lot of changes could end up hurting you — and that includes selling your stocks simply because we are in a bear market.

If you aren’t confident in your asset allocation, it helps to revisit it from time to time, says Andy Schuler, EVP, investment managing director at PNC Private Bank. “What are you trying to achieve, and have the recent market events changed that? Is your assessment of your own risk tolerance what you thought it was? If your overall strategy is appropriate and in line with your objectives, you can rebalance.”

Stay the Course

It can be tempting to sell your stocks and rely more heavily on assets like bonds and cash during a bear market. But doing so means you will be selling your stocks when they are at a low point. This creates a double-edged sword where you sell your stocks for less than you paid, but you also pass on the opportunity to buy more stock at a discount.

“Staying the course has its rewards,” says Molly Ward, a financial advisor with Equitable based in Houston, TX. “What could even be more rewarding, is what some millionaires do — some love to buy stocks when they are on sale (when the market is down)!”

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While it can be discouraging to see these drops, they are only temporary. In fact, there have been 26 bear markets since 1929. In 1929, S&P 500 dropped below 100 points in the wake of the Great Depression. Today, the S&P 500 is around 4,000 points — roughly 40 times higher than its low during the Depression.

Indeed, the stock market tends to bounce back, even after a recession. Speaking of buying stocks while the market is down, Ward said, “The bounce back of the stocks can be quicker when employing this strategy. It takes some guts and a financial planner would advise them not to use cash that they need in the next few years.”

Invest Automatically

Investing automatically is a good idea for multiple reasons. It has the obvious benefit of convenience, but it also means you won’t have to check your portfolio quite so often. And that means you’ll be less tempted to sell your investments during a bear market. In other words, it helps you stay the course.

There are a few ways you can automate your investments, none of which are particularly complicated. For most people, the first way to automate is through your job. If your employer offers an employer-sponsored retirement plan such as a 401(k), you can elect to have your employer withhold some of your pay from each paycheck, which then goes into your retirement plan.

Don’t forget to select your investments, though. If you are having trouble deciding on your investments, you can invest in a target-date fund. But if you don’t select something, your employer might pick something for you, or, worse — it could end up sitting in cash.

Another way to automate your investments is with your own retirement account, such as an IRA. You can have the brokerage transfer money into the account on a schedule, such as every time you get paid. Depending on the brokerage, you might be able to have the money invested automatically, too.

Dollar-Cost Averaging

Dollar-cost averaging is a simple investment concept that hinges on the idea that stock market conditions are always changing. In other words, we don’t know what tomorrow brings. Will the market go up? Will it stay the same? Go down? Even if we could answer this question, for most of it, it would likely take too much research to come to a logical conclusion.

Dollar-cost averaging avoids this by investing the same amount of money consistently over time. You might invest $500 per month in your IRA, just as an example. You don’t adjust that amount one month because the market is going down, or increase it because the market is going up. In other words, you don’t try to time the market. You simply invest consistently over a period of many years.

This point is in line with the others mentioned previously — it helps you stay the course and stick with your strategy. Rather than trying to beat the market, the point is to just understand that you are merely along for the ride — as wild as that ride might be sometimes.

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This article originally appeared on How Millionaires Invest During a Bear Market: Learn What the Rich Do