How to Manage Investments in a Bear Market

By Nick Mango

Recent market action has once again sparked fears about another impending bear market. And this creates quite the conundrum for investors, who on one hand have the financial media and talking heads on TV calling for another market apocalypse, while Wall Street is counseling to remain calm and hold on for the long term. That’s no doubt hard to do at a time when emotions are running high, and potential wealth and retirement assets are seemingly disappearing with every additional down day in the markets.

So, what should investors really do in this situation, particularly if the recent 6.6% market freefall is only the beginning of a much larger and more sustained recession or stock market crash?

What Are the Best Ways to Manage Investments in a Bear Market?

Well, to be clear, we’re advocating for more active (and proactive) portfolio management. That’s why, throughout the course of this two-part article series, investors will discover several practical tools and tactics for staying safe yet still making capital work in the markets, even if the worst case materializes and we once again wind up in the throes of a bear market.

Investment strategies for a bear market.

Protect Profits Early On Through Timely Selling & Rebalancing

Traditionally, the worst bear market losses happen near the end. Tweet: Traditionally, the worst losses in a bear market happen near the end. https://ctt.ec/14sHm+ That’s why calculated, active management in the early stages may help lessen or even prevent a potential 20%, 30% or even 50% portfolio decline.

Holding onto under-performing equity investments for the duration, or while waiting for an up day on which to sell, might only prolong the pain and escalate losses. So, following what’s been a nine-year bull market — one of the longest ever — a clear starting point for any bear-proofing process would be to methodically sell a percentage of higher-risk equity positions. This accomplishes three important objectives:

  1. Locks in profits thereby preserving gains and preventing the risk of giving them back
  2. Boosts liquidity and bolsters the all-important cash component of the portfolio
  3. Frees up assets for calculated, new purchases

Every investor’s goals, risk profile and time horizon for retirement are going to be different, so while millennials or those with 20 years or so until retirement can likely tolerate more risk—and hold a higher percentage of equities as a result—a more conservative course might be to allocate 30% to cash (or a money market fund), 40% to equities and 30% to bonds while navigating bear market conditions. That’s actually rather simple to achieve for 401(k) retirement accounts, which can be retooled and rebalanced in seconds and with just a few clicks.

401(k) vs. IRA Strategies

Because the majority of individuals have 401(k) accounts through their employers, the selling and rebalancing process will involve selling some (or all) of their fund holdings in riskier sectors like energy, technology and consumer discretionary, and overweighting cash and more conservative funds that track assets including bonds, utilities, consumer staples and, perhaps, gold and commodities, global markets and real estate.

Unfortunately, most 401(k) programs offer somewhat limited reach in terms of fund choices. However, to unlock more flexibility and a broader range of investment choices, 401(k) investors might opt for:

  • Target-date funds: By selecting a fund with a nearby target date, investors would effectively limit risk exposure through a more conservative asset mix that’s heavier on bonds and fixed-income vehicles than other funds with longer target dates. This can add a necessary layer of protection in volatile and/or down market conditions.
  • A self-directed brokerage account: A widely underutilized feature of many 401(k) programs, self-directed brokerage accounts allow participants to become more nimble, active investors by opening up a wealth of additional, low-cost investment possibilities. A self-directed account may enable access to ETFs and individual stocks and bonds, plus ultra-conservative mutual funds and those that track sectors and asset classes that aren’t covered by managed funds in standard 401(k) accounts (like real estate, emerging market and international stocks, commodities and alternative assets).

Despite the many merits for investors, however, two recommendations about self-directed accounts would be to limit investment allocation to no more than 15% of total retirement assets and to manage expenses by only selecting low-cost funds and investments.

Elsewhere, beyond the quintessential 401(k) accounts, IRAs are known for utility and affording investors the additional freedom and flexibility to short the market using inverse ETFs as well as use tools like options which can be invaluable for generating returns despite prevailing bear market conditions.

In all, IRAs and the aforementioned self-directed brokerage accounts can provide investors ample opportunity to use a more active approach that’s better-suited for bear market conditions than traditional buy-and-hold investing.

Regardless of the account type, ensuring broader diversification and avoiding overexposure to any one market, sector, fund or even company stock is a valuable tactic for shielding retirement assets from the worst of any bear market.


About the Author
Nick Mango

Nick Mango is a freelance writer and editor whose work in the investing, trading, and financial communities spans more than 12 years. He’s co-author of the book, Traders at Work (Apress, 2013), and has consistently published content across major media outlets and the Web’s most well-known and respected financial portals, including OTAcademy.com.

Over 100,000 Lessons from the Pros readers. Check out last week's issue.

Free Class