How to Invest During a Stock Market Crash/Bear Market

Nobody knows when a stock (or the stock market) has hit bottom. People can speculate — and every analyst hoping for a little bit of television fame most certainly will — but no person, no matter how many past predictions they claim to have gotten right knows when a stock or the market has fallen as low as it will go.

And, while it’s tempting as an investor to wait for better prices, that’s a dangerous game to play. Yes, you might get a better price by waiting, but you also may find yourself waiting too long and missing an opportunity.

Down markets, bear markets, market crashes — whatever you want to call them follow no rules. A market correction takes overhyped companies that have under-delivered down in value while also dragging down shares of strong companies which have performed well.

As a long-term investor your job (or at least the best path to accumulating wealth) isn’t figuring out where the bottom is. Instead, it’s sorting out the companies that have a bright long-term future, where today’s price will hardly matter, from companies that saw their share prices drop because they don’t have sound business fundamentals.

That’s not always easy to identify when you consider some examples:

There are investors and analysts who feel both ways on any of the questions above. But, the best thing about investing is that you only have to put your money in stocks where you have deep convictions.

What Is a Long-Term Investor?

Long-term investors consider down markets as an opportunity to add to their portfolios. Before you can think about doing that, you have to think about what it means to be a long-term investor.

A long-term investor buys shares in companies they intend to hold for years — essentially forever. Usually, a long-term investor has an investing thesis — a reason why — they want to own the stock. That thesis should give the long-term investor faith in that stock even when the company’s share price drops.

Basically, a long-term investor checks in on their holdings to make sure the company has not made a change that causes it to diverge from that thesis. For example, did the CEO change and the new leader made a major change to how the company operates? Or, did something huge happen in the market that causes you to change how you see the company’s prospects.

Long-term investors understand that many companies — Amazon being the most famous example — don’t manage to deliver quarterly results, Instead, their leaders make the best decisions for the company to succeed over decades, not quarters. That’s why Amazon (to stick with the example) has been willing to have money-losing quarters where it invests in the infrastructure it needs for long-term success.

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Moves like that can send a company’s share price down, but it’s hard to argue that Amazon (and many other market leading companies) are wrong to view their business as a long-term enterprise, not a quarterly exercise in releasing press releases.   

How Do You Get Rich in a Bear Market?

Down markets, bear markets, and stock market crashes put good companies on sale. If you have a company you believe in (and perhaps already own) you can buy shares fully believing you are making the right choice for your future, even if the bear market continues and stock goes down.

Long-term means years, sometimes decades, and a share price falling because of market conditions or macroeconomic conditions allows you to buy shares and do what’s know as dollar cost averaging. That’s where instead of waiting for the best price, you buy shares as funds allow, averaging the price you have paid to own stock in the company.

A falling market actually allows you to lower the average cost per share of your best holdings if the share price has fallen below what you first paid.

The challenge — and it’s a big one — is that long-term investing means you hold shares for a long (or very long) time. Right now, that may mean your portfolio has taken a big hit, but if you believe in the company’s you own in the long-run, then holding them and adding to those positions makes sense.

And, while I am an advocate for long-term investing, I’m hardly alone in that as legendary investor Warren Buffett has followed the same principles and has delivered some famous quotes on the topic.

“Someone’s sitting in the shade today because someone planted a tree a long time ago,” he said.

The Oracle of Omaha has also regularly said two other things that illustrate this philosophy,

“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

“Our favorite holding period is forever.”

Does long-term investing have to be your only strategy? Of course not, you can also make money being a more active trader. If you more advice on long-term investing, check out TheStreet Smarts, a product designed to help you get started and build a long-term mindset. And, if you want a more active approach along with that (or on its own), the managed portfolio at TheStreet’s Action Alerts Plus gives you access to world-class portfolio manager Chris Versace and Bob Lang, so you can see how they make money during these scary times.