Before preparing your portfolio for a bear market, it’s important to note that absolute market timing is not recommended for any investor, regardless of their knowledge or investment skills. Even the best professional money managers do not have consistent success in navigating the complexities of capital markets and economic conditions. But that does not mean you shouldn’t learn how to prepare for investing in both bear and bull markets.
Stocks and Sectors
When interest rates rise, the economy is typically on the verge of a peak, as the Federal Reserve raises rates when it appears that the economy is growing too quickly, thus making inflation a concern. Those looking to time the market with sectors aim to achieve positive returns on the upside while preparing to shield themselves from the more difficult downturns when the market changes.
Consumer Staples Sector
Consumer staples are also known as “non-cyclical.” People still need to buy food and other products for daily life, collectively called consumer staples, when a recession hits.
Healthcare Sector
Like consumer staples, consumers need medication and medical care during both good times and bad. This is why the healthcare sector may not be as severely affected in bear markets as the broader market average.
Gold and Precious Metals
When traders and investors anticipate an economic slowdown, they tend to move into funds that invest in real asset types such as gold funds, which they see as more reliable than securities, currencies, and cash.
Bond Funds
Bond prices move in the opposite direction to interest rates, and some types of bonds can reduce interest rate risk in bear market conditions.
Short-Term Bonds
Rising interest rates cause bond prices to fall, but the longer the maturity, the more prices will decline. Therefore, the opposite holds true: short-term bonds perform better than long-term ones in a rising interest rate environment due to their pricing.
Intermediate-Term Bonds
Although the maturities are longer with these funds, any investor cannot predict what interest rates and inflation will do. Therefore, intermediate-term bond funds can provide a good option for investors who wisely avoid guessing what the bond market will do in the short term.
Inflation-Protected Bonds
Inflation-protected bonds – also known as Treasury Inflation-Protected Securities (TIPS) – perform well before and during inflationary environments, which often coincide with rising interest rates and economic growth. Some notable TIPS funds include the Vanguard Inflation-Protected Securities Fund (VIPSX) and the PIMCO Long-Term Real Return Fund (PRAIX).
Defensive Sectors
Sector funds focus on a specific industry or social objective or industrial sectors such as healthcare, real estate, and technology. Their investment goal is to provide concentrated exposure to specific industrial groups called sectors.
Defensive Sector Funds
Defensive sector funds invest in sectors that may perform well compared to other industries during a period of market or economic weakness, such as a bear market or ensuing recession. Examples include stocks in companies that sell consumer staples like food and medicine or stocks in the utility sector.
Bear Market Funds
Bear market funds are not suitable for everyone. They are pooled investment portfolios built and designed to make money in a bear market, hence the name. To do this, bear market funds invest in short positions and derivatives. As a result, their returns generally move in the opposite direction of the market index.
Lazy Portfolio Strategy
For most investors, it may be simply wise to steer clear of market timing and detailed strategies attempting to wring every bit of possible return. Instead, you can diversify your portfolio with index funds and let the market do what it will, knowing that even professionals cannot reliably predict it. A lazy portfolio strategy such as the “Three-Bond Lazy Portfolio” can help you diversify while keeping management burdens low. A portfolio like this may look like, for example:
–
40% Total Stock Market Index (VTSMX)
– 30% All-World ex-US ETF (VEU)
– 30% Total Bond Market ETF (BND)
A portfolio like this provides exposure to multiple markets and asset classes, but it is just one example. Above all, do what works best for you.
Frequently Asked Questions (FAQs)
What is a bear market?
A bear market refers to a decline in the economy, when security prices drop by 20% from a recent peak within a short period.
Should I invest during a bear market at all?
Whether you decide to buy stocks or bonds during a bear market depends on your personal financial situation and goals. However, there are benefits to buying when the market is down, namely lower prices. Certain investments are wiser than others at this time, so you should also consider your risk tolerance when making your decision. A diversified portfolio and defensive sector funds are two ways to mitigate risk during a bear market.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and maintain the accuracy and reliability of our content.
Board of Governors of the Federal Reserve System. “How Does Monetary Policy Affect Inflation and Employment?”
Federal Trade Commission. “Investing in Gold.”
U.S. Securities and Exchange Commission. “Interest Rate Risk – When Interest Rates Rise, Bond Prices Fall,” pages 1-3.
Vanguard. “Vanguard Short-Term Bond ETF (BSV).”
PIMCO. “Low Duration Fund.”
iShares. “iShares Core U.S. Aggregate Bond ETF.”
TreasuryDirect. “Treasury Inflation-Protected Securities (TIPS).”
PIMCO. “Long-Term Real Return Fund.”
Vanguard. “Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX).”
Morningstar. “Morningstar Equity Sector Structure,” pages 1-2.
Julie M. Salaber. “Equity Returns, Wrong Timing over the Business Cycle,” SSRN.
Morningstar. “Alternative Investments Monitor,” page 5.
Morningstar. “Bear Market Class.”
Yahoo Finance. “S&P 500,” historical data.
Enhanced Portfolio. “Review of the Three Lazy Bonds Portfolio and Vanguard ETFs for Use.”
Vanguard. “Vanguard Total Stock Market ETF.”
Vanguard. “Vanguard FTSE All-World ex-US ETF.”
Source: https://www.thebalancemoney.com/mutual-funds-in-a-bear-market-4061116
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