Bear Market Investing: 3 Things to Do to Make Money

I think I speak for all investors when I ask, “Did anyone get the license plate number of the truck that his us?”

In a span of less than five weeks, we’ve witnessed the benchmark S&P 500 (SNPINDEX: ^GSPC) lose around a third of its value, with the uncertainty surrounding the coronavirus disease 2019 (COVID-19) building into an all-out panic. With absolutely no precedent to the mitigation efforts currently being undertaken to control the spread of COVID-19, we’re liable to see some historic (and ugly) economic data on the horizon. Perhaps, then, it’s no surprise that the S&P 500 has logged 10 of its 13 largest single-day point declines over the past month.

But the fact is that we’ve seen bear markets before, and there are things you can do right now to ensure your wealth grows once we emerge from the sharpest downturn in the history of the stock market. Consider this your crash course in “Bear Market Investing 101.”

Image source: Getty Images.

1. Hold tight, unless your investment thesis has changed

Arguably the most decisive thing you can do during this bear market, no matter how long or steep it becomes, is to avoid selling stakes in companies you believe in.

Now, to be clear, there are some very good reasons to consider selling a stock. For instance, if you need the money or have a financial emergency, selling stock to raise capital is a viable move.

Likewise, if your original investment thesis in a company no longer holds water or has been altered, selling might make perfect sense. As an example, Boeing‘s (NYSE: BA) long-term outlook will most assuredly deteriorate from COVID-19. The airline industry has a habit of needing assistance during periods of recession, and new plane orders for Boeing have, for the time being at least, ground to a halt. Couple this with Boeing’s MAX 737 problems, and there’s more than sufficient reason for investors to consider selling Boeing stock, even after its tumultuous past month.

Comparatively, you’ll likely find that few of your investments have undergone any true fundamental change because of the coronavirus. Sure, Coca-Cola (NYSE: KO) has lost around 35% of its value in less than five weeks, but is this really justified because of a spreading illness? Coca-Cola has one of the most recognized brands worldwide, and its incredible cash flow is backed up by a 58-year streak of increasing its dividend. In other words, if you own Coca-Cola, your investment thesis hasn’t changed one iota because of COVID-19. 

Take this time to reassess your holdings to determine if selling is really a prudent move. My guess is selling will, in nearly all instances, not be necessary.

Image source: Getty Images.

2. Trust the process and buy into weakness

The second thing you’ll want to do may be even harder than holding on to your existing stocks. Namely, you’ll want to trust the process and buy during this bear market correction, assuming you have disposable income to spare that won’t be needed to pay bills or for emergencies.

Although trusting the process can appear difficult when it feels like the market opens lower by 5% three or four days every week for the past month, historical data shows us that brighter pastures are ahead.

Since the beginning of 1950, the S&P 500 has undergone 38 corrections of at least 10% (not rounded). With the exception of the ongoing correction, which qualifies as a bear market given its decline of at least 20%, we’ve witnessed the other 37 stock market corrections eventually erased by a bull-market rally. In fact, 23 of these 37 corrections went from peak to trough in 104 or fewer calendar days, suggesting that the pain investors are contending with tends to be relatively short-lived.

Another way to look at the data is this: If you bought an S&P 500-tracking index fund at any point during any of these previous 37 corrections, you had made money as recently as mid-February 2020. This, too, shall pass, and at some point in the future the broad-based S&P 500 will be reaching all-time highs. The question is whether you’ll be kicking yourself for not buying during this bear market or patting yourself on the back for buying into high-quality businesses.

Image source: Getty Images.

3. Buy dividend stocks

The last thing you’ll want to do to make money and perfect your bear market investing strategy is to consider buying dividend stocks.

Understand that “buy dividend stocks” doesn’t mean you have to ignore high-growth stocks that you’ve been eyeing. I know I’ve taken the opportunity to add a number of high-growth stocks to my portfolio recently that don’t currently pay a dividend. But the reason I say it’s a smart idea to focus on dividend stock is simple: They outperform.

Back in 2013, J.P. Morgan Asset Management released a report that examined the performance of publicly traded companies that initiated and grew their dividend between 1972 and 2012 relative to public companies that didn’t pay a dividend. The result? Companies that initiated and grew their payout realized an almost 500% better average annual return (9.5%) over this 40-year period than stocks that did not offer a dividend (1.6%).

Take healthcare conglomerate Johnson & Johnson (NYSE: JNJ) as an example. Johnson & Johnson is currently working on a streak that’s seen its payout rise for 57 consecutive years. What’s more, it’s delivered 36 straight years of adjusted operating earnings growth. The coronavirus may be a huge disruptor economically over the short-term, but it’s not going to have much impact at all on J&J. That’s because demand for Johnson & Johnson’s products, such as pharmaceuticals, operate independent of how well or poorly the economy is performing.

If you seek out high-quality dividend stocks, buy into stock market corrections, and stay the course with companies that still hold true to your investment thesis, you’ll be well on your way to creating long-term wealth.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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