Bear markets can be fearsome creatures, as I have detailed in my previous article. They create a cloud of despair and pessimism, and the mood all around is bleak and sombre. Many investors shudder at the thought of a bear market as it implies that their portfolios may get decimated. Here are three useful tips on how you can survive a bear market.
Monitor The Business
During a downturn or recession, remember to continue to invest in good-quality, strong and well-run companies which have a strong balance sheet and also generate healthy free cash flows. Obviously, such businesses are not immune to sharp declines in demand which may eat into profitability and also cause revenue to decline. However, it is important for investors to keep a watchful eye on the business to ensure it is still chugging along and that management is doing their best under challenging circumstances.
History is filled with great companies which became stronger after a bear market, as their competitors were unable to withstand the downturn and went bust. Strong companies are also in an excellent position to tap on their war chest to make juicy acquisitions at rock-bottom prices, further building up the business and positioning it for the eventual recovery.
Dividends And More Dividends
Investors should continue to reinvest dividends where possible, from companies which continue paying them even through the tough times. Even during the Great Financial Crisis back in 2008-2009, there were companies which continued paying out dividends to shareholders, albeit at a reduced rate to conserve cash. Receiving dividends during a bear market is vital for the investor as it helps him to replenish his cash stash to take advantage of bountiful opportunities. Buying more strong companies which also pay dividends creates a virtuous cycle as the compounding effect kicks in, benefitting the investor in the long-term.
In the midst of an economic downturn, it is vital to maintain good social networks and also establish emotional connections with like-minded investors. The right investors provide a stable mental base and build mental resilience by reminding us of long-term goals and that “this too, shall pass”. Do not neglect the mental aspect as it can contribute to poor appetite and also poor sleep patterns if not managed well, which in turn would affect one’s overall health.
The Foolish Bottom Line
The above three tips should serve investors well should the world tumble into another recession and bear market. Keep in mind that such events are inevitable and it is up to the investor to stay prepared both financially and mentally. Remember: This too, shall pass.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.