Investing in a Down Market: Strategies and Tips

By Michelle Clardie on 03/21/2023.
Reviewed by Dan Gatsby .
When the market is down, it can be difficult to know how to invest your money. Seeing stock prices falling is a deterrent for investors; why would you invest in something that’s losing value?

Knowing how to invest in a down market is about understanding market cycles. Cycles are an inherent part of economic markets, so you can anticipate them, even if you don’t know exactly when a market downturn will occur. Just as importantly, the existence of these cycles confirms that the market will always bounce back! This means that investing in a down market is similar to buying assets on sale; you are able to buy investments while the price is lower, then watch your gains as the values increase back to pre-downturn levels.

In this article, we want to share tips and strategies for investing in a slow bear market. We’ll even discuss a few of the best investments in a down market so that you can make sound investing decisions while you wait for the market to rebound. 

Here are our strategies and tips for investing in a down market.

Investing Strategies in a Down Market

Here are seven of the best investing strategies in a down market.

  1. Choose index funds over individual stocks.
  2. Minimize risk to protect your wealth.
  3. Rebalance your portfolio.
  4. Continue contributing to your retirement account.
  5. Consider tax-loss harvesting.
  6. Invest in real estate.
  7. Explore alternative investments.

1. Choose Index Funds Over Individual Stocks

Index funds are bundles of stocks that follow a specific market index (like the S&P 500, for example). When you buy a share of an index fund, you are actually investing in dozens or even hundreds of companies. This provides a distinct advantage over investing individual stocks: automatic diversification. If one company’s stock tanks, the remaining companies can help your investment hold its value.

Of course, you could diversify your portfolio yourself by hand-selecting dozens (or hundreds) of companies to invest in. But the research time and potential trading fees make this an inefficient option. Having said that, you could opt for a mutual fund, in which the companies are hand-selected by a professional fund manager. However, studies have shown that mutual funds consistently underperform index funds, especially when the higher management fees for mutual funds are factored in.  

If you’re going to invest in the stock market during a down market, index funds are your best bet.

2. Minimize Risk to Protect Your Wealth

If you’re at a point where protecting your wealth is more important than growing it, you may want to consider ultra-low-risk investment options. Investments like government bonds and FDIC-insured money market accounts keep your money safe while offering small, but reliable, yields. 

This conservative strategy won’t generate strong returns, but you’ll have the peace of mind that comes with knowing you won’t lose money. 

3. Rebalance Your Portfolio

Most investors’ portfolios are built on a “target asset mix.” This asset mix is simply the combination of different asset classes that an investor chooses based on factors like age and risk tolerance. In many cases, when one asset class is declining, another is rising. For example, if stock prices are falling, the value of bonds on the secondary market may be increasing because lower-risk bonds are suddenly the more attractive option compared to higher-risk stocks. 

As the values of asset classes change, your asset mix can quickly become unbalanced. For example, the value of your stocks may have fallen while bonds have risen, leaving you with a higher ratio of bonds to stocks than your target mix calls for. So it may be time to invest more in stocks, which will bring your portfolio back in line with your target asset mix.

By rebalancing your portfolio, you’re essentially buying the assets that are needed for your target asset mix at a discount while prices are lower than normal.

4. Continue Contributing to Your Retirement Account

If you’re still saving for retirement, do not put your contributions on hold during a down market. You want to continue investing in your 401(k) and/or IRA(s) throughout recessions. 

Retirement accounts typically take advantage of “dollar cost averaging.” Dollar cost averaging is when you invest a set amount of money in a pre-determined investment at regular intervals, regardless of changes in the value of the investment. If you have 10% of each paycheck withheld as 401(k) contributions, to be automatically invested in a set index fund, for example, you are dollar cost averaging. 

This is a solid long-term strategy. Some quarters will see above-average gains, and some quarters may see losses. But you’ll benefit from the average growth rate over time.  

5. Consider Tax-Loss Harvesting

Tax-loss harvesting is when you purposely sell off an investment at a loss to save money on your income taxes. This is an advanced strategy, reserved for extreme market drops. And it should only be employed under guidance from a tax professional.  

If your tax advisor recommends tax-loss harvesting, it’s critical that the proceeds from the sale of your asset are reinvested immediately. This is the only way to take advantage of the potential gains from the economic recovery following the recession.

6. Invest in Real Estate

Real estate is a low-risk investment with a history of stable returns over the long run. In many cases, the stock market and the real estate market rise and fall together, so if the markets are down, you can purchase property for less than you could have done a year ago. This leaves more room for the property value to appreciate when the market recovers. Furthermore, real estate is less volatile than the stock market, so many investors appreciate the stability of property ownership. 

There are many different ways to invest in real estate. Here are a few of the best options for investing in real estate during a down market:

  • Buy a rental property. Even during recessions, rental rates often hold steady. By purchasing a rental property when real estate values have temporarily dipped, you get an income-generating asset at a lower price. And this means a higher ROI for you!

  • Invest in real estate-based securities. In How to Invest in Real Estate Without Buying Property, we explore several options for investors who want to realize the benefits of real estate investing without the commitment that property ownership typically requires. REITs, real estate ETFs, and hard money loans are all covered in that article. 

  • Take advantage of real estate crowdfunding and syndication. There are a few differences between real estate crowdfunding vs. syndication, but the main concept is the same: a sponsor will pool funds from multiple investors to finance a real estate project, and the investors will share in any proceeds. Crowdfunding and syndication are incredibly flexible, with options ranging from fix-and-flips to multi-family rentals and everything in between! And, because the project is backed by multiple investors, the upfront investment amount is far lower than it would be if you were to buy a property on your own.     

7. Explore Alternative Investments

A down market is an opportunity to further diversify your portfolio by getting into alternative investments. Alternative investments represent a broad category of asset classes from collectibles to precious metals to digital assets. 

Many investors opt to stick with safer investments during a market downturn, so the reward potential for the investors who are willing to take on more risks can be even greater during a bear market than a bull market.

Tips for Investing in a Down Market

Regardless of which strategies you decide to use, the following tips apply to all investors experiencing a down market.

  • Stay calm. Remember, cycles are a natural part of the market; what goes down will come back up, so there’s no need to panic or make rash decisions. 

  • Avoid pulling your money. One of the greatest benefits of investing early is that you have time to wait out these cycles; if you don’t need to cash out your investments to cover living expenses, you can ride the market and cash out under more favorable conditions. 

  • Focus on the long-term. While we understand the need for short-term investments, a down market is a time for a long-term perspective. 

  • Keep investing rather than sitting on cash. If you’re deciding between holding cash vs. investing, you’re almost always better off investing. When you sit on cash, not only is your money unable to grow, but it could actually be losing value to inflation. 

  • Take a more cautious approach if you’re close to retirement. As you near retirement protecting your wealth takes priority over growing it. Safer investments will serve you better since you need to make sure your money will be available when you need it. 

  • Don’t try to time the market. Timing the market doesn’t work; you can’t know if the market has peaked or bottomed out until weeks or months after that moment has passed. Rather than trying to time the market, simply implement your long-term strategy, and allow the market to ebb and flow as designed. 

Investing in a Down Market with Gatsby Investment 

In the real estate vs. the stock market debate, real estate provides several advantages over stocks, including stability, return potential, and tax benefits

Gatsby Investment is a real estate syndication company, based out of Beverly Hills, that specializes in low-risk real estate projects with high return potential. With expert insight into emerging housing market trends, we have been able to achieve double-digit annualized returns for investors, even as the housing market began to stagnate.

A down market is a perfect time to invest in long-term real estate projects. With our unique Multi-family built-to-rent investment model, you can take advantage of the opportunistic stage of multi-family developments as well as the passive income potential of multi-family rentals.  

Explore our real estate investment offerings and keep your money growing, even in a down market!

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