How to Survive a Bear Market? advice for newcomers

Typically, a bear market creates a sense of uncertainty for any investor. Even more so for a new person, for them it feels like the end of the world. We all know that during a bull market cycle, investors are sure to profit. And in a bear market like this, there is unimaginable pessimism.

Dylan Dewdney, co-founder and head of strategy at Kylin Network, told Cointelegraph that the two main mistakes investors make when they feel anxious are “over-investing and not investing firmly.”

“You need to find the sweet spot where you have enough confidence in your investment while managing the resources you put into it so that you can be 100% comfortable with patience over a long period of time. In the end, bear markets are where the magic really happens — e.g. , bought Ethereum at $90 in December 2019," Dewdney said.

In early May, traders made nearly 43,000 buy and sell requests on cryptocurrency exchanges, according to blockchain analytics firm Glassnode. Among them, Bitcoin is worth as much as $3.1 billion. However, the panic that sparked these requests came from Terra's crash, which sent the market down even further.

A bear market occurs when asset prices generally fall by at least 20% from their most recent high. For example, the current bear market has seen Bitcoin (BTC) drop by more than 55% from its record high of $68,000 in November. At the time of writing, Bitcoin is currently trading below $22,000.

Bear Markets: Origins, Severity, and Duration

According to Nerdwallet, bear markets are often associated with the global economy. That is, they occur before or after the economy goes into recession. Where there is a bear market, it is either an ongoing economic crash or an impending crash.

Essentially, a sustained decline in prices from recent highs is not the only indicator that a bear market is ongoing. Investors must also consider other economic indicators. This is so they can see if a bear market is in play. Some of these indicators include interest rates, inflation, and employment or unemployment rates, among others.

However, the relationship between the economy and bear markets is simpler than that. As investors take note that the economy is shrinking, corporate profits are widely expected to start falling soon, too. And, this pessimism makes them sell their assets, which drives the market lower. As Scott Nations, author of The Anxious Investor: Mastering the Mental Game of Investing, says, investors often overreact to bad news.

In any case, bear markets are shorter than bull markets. According to a recent CNBC report, the bear market lasts about 289 days. However, bull markets can even exceed 991 days. In addition, the Invesco data analysis report shows that the average loss caused by the bear market is 33%. As a result, down cycles are usually less impressive than the bull market's average return of 159%.

While no one knows for sure how long the bear market will last, there are a few tips to help you through it.

Riding the bear market

As an investor, there is probably nothing anyone can do to prevent adverse market conditions or the economy as a whole. Still, there are a number of potentially big moves people can take to protect their investment.

dollar cost averaging

Dollar cost averaging (DCA) describes an investment strategy in which an investor periodically purchases a fixed dollar amount of an asset regardless of the asset's dollar price. The strategy is based on the belief that prices generally pick up pace over time and eventually trend upward during bull markets.

James Butterfill, director of research at CoinShares, told Cointelegraph that Bitcoin now has a well-established negative correlation with the U.S. dollar:

“This makes sense due to its emerging store-of-value properties, but it also makes it unusually sensitive to interest rates. Over the past six months, Bitcoin has entered a ‘crypto winter,’ which can largely be Interpreted as a direct result of increasingly hawkish rhetoric from the Fed. The FOMC statement showed this well and we could observe a clear link to the timing of the statement and price action.”

When this prudent approach to investing is mastered, the investor's purchase price averages out over time. That is, people can enjoy the benefits of buying on dips and avoid investing their life savings at market highs. After all, as scary as bear markets are in the investing world, they're also the best time to buy crypto assets at rock-bottom prices.

Diversified Portfolio

For investors with multiple assets in their portfolios, the impact of a bear market may not be as severe. When fully entering a bear market, asset prices typically plummet, but not necessarily by the same amount. Therefore, this valuable strategy ensures that investors have winners and losers in their assets during bear markets. Thus, the total loss of the portfolio will be minimized.

Consider Defensive Assets

In a long bear market, some companies (mainly smaller or young ones) will weaken along the way. And other established companies with stronger balance sheets can withstand harsh conditions if necessary.

Therefore, anyone looking to invest in company stocks should choose stocks of companies that have been in business for a long time. These are defensive stocks. Also, they are generally more stable and reliable in bear markets.

bond

Bonds can also provide investors with some relief during a bear market cycle. This is because bond prices generally move inversely to stock prices. As such, bonds are a key part of any near-perfect portfolio, allowing investors to weather the pain of a bear market with relative ease.

Index Funds or Exchange Traded Funds

Some industries are known to do quite well during market downturns, including utilities and consumer goods. More than any other industry, their performance has earned them the title of "stable assets." It may be wise to invest in the above sectors through index funds or exchange-traded funds (ETFs). This is because each index fund or ETF holds shares in different companies.

blindly

There is no doubt that bear markets prompt investors to flee and never look back. Their will and endurance will also be tested. But, as history has shown, bear markets don't last forever, and neither will this one.

From 1928 to the present, there have been more than 26 bear markets, according to the Hartford Funds. And, every bear market was followed by a bull market, bringing in enough profits to cover any losses that might have occurred.

So it's important to always keep your focus out of the general downturn, especially if you're investing for the long term, such as retirement. Eventually, you will witness a bull market that will outpace a bear market.

the final decision

As mentioned earlier, bear markets come with enormous risks. However, they also provide a good foundation for the next bull market to succeed. However, it depends on good strategic investment planning and patience. So when the market finally turns around, whether you always trade DCA, diversify into other assets, invest in ETFs and index funds, or stocks, you can ensure profits.

Losing money is always a bitter pill to swallow, but the best way to survive market troughs is not to run away. Instead, be aware of the various recovery options and stay calm.

“While Bitcoin’s price performance has been weak in the face of an aggressive Fed, the current stagnation in price performance is likely to be short-lived. We believe there is a high probability that the Fed will make a policy error and Bitcoin prices could diverge from growth stocks. With Meanwhile, the former is likely to benefit from a dovish Fed and a weaker dollar, while the latter underperforms in the face of recession or stagflation," Butterfill said. He added:

“Sadly, we think the U.S. and the rest of the world could be in recession in 2023, although there are still many unknowns. Maybe stagflation then develops into a recession? Since liquidity traps do have an impact on central bankers, we believe , Bitcoin is a good insurance policy against this monetary policy chaos.”