Investing in a bear market

A diversified portfolio and knowing there are still opportunities can help weather the storm

Throughout my nearly 30 years in money management, I have experienced bear markets — defined as a correction of 20 percent or more — on average every five years.

Having survived multiple bear markets and some severe corrections helps me maintain my long-term objectives and strategy.

Nonetheless, each bear market is painful, and as the market is falling, it often feels like there is no end in sight. Even as the market is climbing back from the low point, there are always experts predicting “the worst is yet to come.”

History and experience have taught successful investors that bear markets have always ended and the patient investor is eventually rewarded. Many of the best opportunities to invest occur in the depths of a bear market.

What lessons can we learn from the past to help investors survive the inevitable future bear market?

As reported in The Wall Street Journal, at the market low in October 2022, the U.S. stock market was down about 25 percent from its peak at the beginning of that year. 2023 had a rocky start, with gains one month and losses the next, but has steadily gained since the middle of March to bring us out of last year’s bear market.

We have emerged with significant gains weighed heavily toward technology-related stocks. Much of the gains have been concentrated in the biggest companies that lead their sectors including Amazon, Apple, Google, Microsoft, Meta, Nvidia and Tesla. However, from the beginning of last year through the middle of this year, these companies only have a slight gain and if the biggest gainer, Nvidia, was excluded, they would still be at a loss.

Chasing after the hottest performers is not a winning strategy. The biggest winners this year lost an average of 46 percent last year, according to data reported in Morningstar.

The role of a financial advisor, especially one who is a fiduciary, is to help protect clients’ money while making strategic decisions to earn a good long-term return.

It makes sense to own some of the leading growing companies, but except for the most aggressive investors, those should not make up an entire portfolio.

Diversification is key. Someone balancing their portfolio between growth companies and higher dividend-paying companies would have suffered losses last year but much more modestly than the overall market.

In the short term, you can’t have it all; no losses in bad market years and only market-beating gains in the good years. But in the long run, having a diversified portfolio including growth-oriented holdings and income-oriented holdings for many is the best strategy. By mitigating losses in a bad year, more investors can weather the inevitable bear markets that occur every five or six years.

Being in the market doesn’t necessarily mean you are “in the market” if your investment portfolio strategy differs from the broad market as the high-dividend strategies performed very differently than the overall market in 2022.

Large U.S.-based companies have been leading the market for most of the past 15 years, but there are times when international companies’ shares outperform domestic ones. There are times when small companies outperform large companies. Further diversification into fixed income securities sometimes makes sense, although losses in bonds in 2022 did not provide shelter from the market decline that year.

Direct ownership of real estate can fit into an investment portfolio as another way to diversify and protect capital. After a long period of extremely low returns, money funds are paying over 4 percent, and shortterm FDIC-insured certificates of deposit are paying 5 percent or more. Reserve funds sitting in bank accounts earning very little can be moved to money funds or shortterm CDs for their fixed returns.

Owning a diversified portfolio that generates a growing stream of income from stocks and real estate has been a great way to build long-term wealth through bull and bear markets. History teaches us that bear markets last less than a year on average.

If your investments are properly diversified, your best bet is usually to stay invested and wait out the volatile period in the market. With the right diversification, going into the bear market with a reliable stream of income generated from your portfolio will make it easier to remain invested.

Giving up on stocks during a bear market can be a big mistake. And if funds are available, it’s a good idea to take advantage of the bargains and invest.

Daniel Cohen is CEO and chief investment officer at Cohen Investment Advisors, a registered investment advisory firm in Bedford.