5 Proven Moneymaking Strategies for Bear Market Investing

KEY POINTS

  • Stock market corrections are far more common than you probably realize.
  • Thinking long-term and focusing on a handful of proven moneymaking strategies can be your golden ticket to riches.

Although bear markets can be scary, they're the perfect time to put your money to work.

It's been a rough start to the year for new and tenured investors. After hitting record closing highs in early January, both the benchmark S&P 500 ( ^GSPC -1.21% ) and iconic Dow Jones Industrial Average dipped into official correction territory (i.e., declines of at least 10% from their highs) in March. Worse yet, the growth-focused Nasdaq Composite fell into a bear market between mid-November and mid-March with a 22% drop.

Although bear markets are a natural part of the investing cycle, they can still be scary for a variety of reasons. For instance, the velocity of downside moves in the stock market often dwarfs upside moves — when the market begins falling, it tends to do so really fast, whereas moves higher are more gradual. Additionally, it's impossible to know ahead of time when a bear market will begin, how long it'll last, or how steep the ultimate decline will be.

Despite these unknowns, putting your money to work during bear markets can be an exceptionally smart move. What follows are five genius bear market investing strategies that have the potential to make you a lot richer.

1. Play the long game

The first strategy is arguably the most important: Relax and play the long game.

Stock market corrections and bear markets are a normal and inevitable part of the investing cycle. Since the beginning of 1950, the S&P 500 has endured 39 corrections of at least 10%. This works out to a double-digit decline, on average, every 1.85 years. Even though Wall Street doesn't follow averages, it gives you a good idea of how common double-digit percentage declines are.

However, the average stock market correction doesn't last very long. Out of the previous 38 corrections (I'm excluding the ongoing correction since we don't know how long it'll last), the average length was only 188.6 calendar days, or about six months. If we narrow it down to just the past 35 years, which is when computers became common on the trading floor and disseminating information to Main Street started to become easier, the average correction length drops to just 155.4 calendar days, or about five months. Comparatively, bull markets typically last for years, with every notable correction eventually erased by a bull market rally.

What's more, data from Crestmont Research shows the rolling 20-year average annual total returns for the S&P 500 between 1919 and 2021 have never been negative. What this means is if you bought an S&P 500-tracking index at any point between 1900 and 2002 and held on for 20 years, you made money. In fact, only two of the 103 end years examined produced an average annual total return, including dividends, of less than 5%. This compares to more than 40 end years where your average annual total return was 10% or higher.

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2. Dollar-cost average into your favorite stocks

A second genius way to invest in a bear market is to dollar-cost average into your favorite stocks.

As noted, it's impossible to know ahead of time when a bear market will occur, how long it'll last, or how steep the decline will be. But every correction is eventually wiped away by a bull market rally. As long as you're invested for the long haul, this makes bear markets and double-digit percentage corrections the perfect opportunity to put your money to work.

Dollar-cost averaging is a way to take part of the emotional aspect out of investing and put money to work in your favorite stocks at either regular intervals, regardless of price, or perhaps at specific share price points. Edging into the stocks you like over time can allow you to build up a position without the regret of feeling like you bought in too early or at a disadvantageous price.

Another reason dollar-cost averaging is such a smart strategy is because the major indexes tend to increase in value over time. If you took the above data from Crestmont Research to heart and put dollar-cost averaging into action, you'll have a really good chance to build wealth over time.

3. Consider basic necessity/defensive stocks

If you're looking for an even more specific bear market investing strategy, buying stocks that provide a basic necessity good or service, or operate in defensive sectors or industries, is typically a smart move.

As an example, electric utility stock NextEra Energy ( NEE -0.89% ) has delivered a positive total return, including dividends, in 19 of the past 20 years. Electricity is a basic necessity service, and demand for electricity doesn't change much from one year to the next. This allows the company to accurately forecast its operating cash flow every year, which comes in handy with regard to outlaying capital for new infrastructure projects and/or acquisitions. If the stock market moves lower, NextEra's operating performance shouldn't be affected.

Another good example is healthcare conglomerate Johnson & Johnson ( JNJ -0.42% ). Since people can't control when they get sick or what ailment(s) they'll develop, there'll always be steady demand for prescription medicine, medical devices, healthcare products and services. People don't simply stop getting sick or needing care because of a bear market, which is why J&J is able to grow its adjusted earnings nearly every year.

As an added bonus, Johnson & Johnson is also one of just two publicly traded companies bestowed with a AAA credit rating from Standard & Poor's (S&P). It's the highest credit rating S&P doles out, and is one notch higher than the U.S. federal government (AA). Put another way, S&P has more faith in J&J making good on its debt than it does in the U.S. government repaying its outstanding debts.

4. Focus on growth stocks

If you love investing in growth stocks, you've enjoyed quite the run over the past 13 years. Growth stocks have run circles around value stocks since the end of the Great Recession, with historically low lending rates paving the way for fast-paced companies to hire, acquire, and innovate.

But did you also know that growth stocks have a penchant for outperforming during a weakening or contracting economy?

Six years ago, Bank of America/Merrill Lynch released a report that examined the performance of growth stocks versus value stocks over a 90-year stretch (1926-2015). Over the full 90 years, value stocks outperformed growth stocks with an average annual gain of 17% versus 12.6%. But during periods of weakness, growth stocks were the clear better performer. Even though interest rates are beginning to rise, lending rates are still well below historic norms and advantageous for fast-growing businesses.

For instance, Meta Platforms ( FB -2.24% ), the company that owns popular social media assets Facebook, Instagram, WhatsApp, and Facebook Messenger, has delivered double-digit annual sales growth looking back as far as the eye can see. This includes during the height of the pandemic in 2020, when Meta generated 22% year-over-year sales growth from its predominantly ad-driven operating model. Advertisers know that Meta gives them the best chance of any social media platform to reach the largest number of eyeballs, which is what makes it such a no-brainer buy in a bear market.

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5. Buy dividend stocks

The fifth and final genius bear market investing strategy is to consider buying dividend stocks.

Back in 2013, J.P. Morgan Asset Management, a division of money-center bank JPMorgan Chase, issued a report that compared the performance of dividend-paying companies to those that didn't pay a dividend over a four-decade period (1972-2012). Not surprisingly, the dividend stocks mopped the floor with the non-dividend payers. Over 40 years, income stocks averaged a 9.5% annual return, compared to a meager 1.6% average annual return for stocks that didn't pay a dividend.

Though the magnitude of this outperformance might be a bit shocking, the end result isn't. Businesses that pay a dividend are often profitable on a recurring basis, time-tested, and have transparent long-term growth outlooks. They're exactly the type of companies that should increase in value over the long run, and that investors shouldn't have to worry about during a bear market.

Take tobacco stock Philip Morris International ( PM 0.56% ) as a good example. Although tobacco isn't the growth story it once was, tobacco stocks like Philip Morris continue to deliver for their shareholders. Since its spinoff from Altria Group 14 years ago, Philip Morris' shares are up a cool 100%. But if you add in the company's juicy dividend, the total return rockets higher to 284%.

What's more, Philip Morris has incredible pricing power and a presence in more than 180 countries worldwide. A bear market pullback isn't going to inhibit its ability to market tobacco and heated tobacco products to consumers.

Buying and owning dividend stocks can be your golden ticket to riches during a bear market.

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Read more from Sean Williams at Fool.com

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