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4 Rules for Staying Sane in a Bear Market

The stock market always has its ups and downs and once the value of stocks has fallen by 20% for a period of time, we’ve officially entered a bear market. When you see your portfolio shrinking, it’s tempting to start selling off assets to minimize losses. But giving in to panic can make things worse. A bear market can be stressful for investors, but you can weather the storm if you make the right moves.

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1. Limit Your Risk Exposure

Investing in stocks can yield some outstanding returns, but it also puts you at the mercy of the market’s whims. The volatile nature of stocks means that it’s possible for an investor to go from riches to rags overnight.

It’s a good idea to make sure (no matter the market) to adjust your asset allocation so that it includes a balance of stocks, bonds and cash investments. How much will be in the riskier investments (like stocks) will depend on a number of factors including how close you are to needing that money and how much risk you can stomach.

While stocks are generally considered a riskier investment, things like certificates of deposit or Treasury bills can cut down on the amount of risk you’re taking on. While you may not earn huge returns, you’ll have peace of mind in knowing that you aren’t exposed to losing as much.

Of course, if you have a sizable financial cushion you may decide you want to take advantage of the bear market to buy stocks while they’re cheap. Buy low, sell high, as the saying goes.

2. Sell Strategically

4 Rules for Staying Sane in a Bear Market

While you don’t want to go crazy selling off every stock you own in a bear market, that doesn’t meant that you can’t unload assets that are dragging your portfolio down. When you’re deciding which stocks to dump, it’s important to look at more than just their most recent performance.

For example, if you’ve got a stock that wasn’t doing so well before a bear market set in, it probably won’t start paying out huge profits once the market improves. In that scenario, you may be better off cutting your losses sooner rather than later.

The same goes for if you’re holding on to stocks that you think may be overvalued. While they may be profitable now, that might not be the case if market conditions take a turn for the worse. Selling them off could protect you from future losses. You can also use tax loss harvesting to sell off under-performing assets and minimize your tax bill.

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3. Be Selective About Buying

Even in the midst of a bear market, you might be able to find securities that can potentially earn solid returns or have the potential to rebound strongly. Taking a look at the individual companies represented in your stock portfolio can help you pinpoint where the best places are to invest moving forward.

If a company’s stock is down but the company itself hasn’t undergone any major shake-ups in terms of its leadership or overall profitability, there might be hope for it when things start to turn around. Buying more of that stock at a reduced price might pay off once the market begins to climb again.

Related Article: 4 Things Wealthy Investors Don’t Do When the Market Tanks

4. Keep Your Focus

4 Rules for Staying Sane in a Bear Market

If you’re hoping that investing will give you quick access to wealth, you’re probably going to end up being disappointed. The most important thing to remember is that stocks tend to move in cycles and periods of decline are typically balanced out by periods of growth. By thinking long term, it may be a little easier to deal with what’s happening to your portfolio in the short term.

Photo credit: ©iStock.com/focusstock, ©iStock.com/PeopleImages, ©iStock.com/comptine

Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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