One of the most important aspects of finding success in any investment class is knowing when to strike. Market trends, projections, and forecasts are all essential parts of the process, but you don’t always have the option to play the projections. Instead, there are times when investors are forced to make decisions based on what’s going on in the moment.
While every investor would love to be able to put their money into the market when things are going well, the fact remains that there are times when you have to invest in a suboptimal market. Understanding what that means for you can help you build your investment strategy in a way that your portfolio continues to thrive in the face of market adversity.
Related: Move Before the Market
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What Is a Bear Market?
The term “bear market” refers to a period where the market experiences prolonged price declines. In most cases, a bear market is when securities prices decrease by 20% or more from their recent highs. This decline in market value usually stems from widespread pessimism among consumers and investors and generally negative sentiment among investors. Bear markets operate in direct contrast to a bull market, which describes a market in which prices are soaring, and investors are making significant profits.
You can typically break up bear markets into four separate phases. In the first phase, the market is booming, as investor sentiment is high, reflected in the higher prices. As the market nears the end of this phase, investors begin to pull out of the market to focus on taking in their profits.
This withdrawal of investors produces the second phase of the bear market, which is a sharp, sudden decline in the prices of securities and the market’s overall value. When the investors who poured money into the market during phase one pull out of the market, the subsequent downturn of phase two is unavoidable.
In phase three, a new group of investors enters the market. Speculators are investors that focus more on the short-term than the long-term when they get into the market when the long-term investors pull out to collect their profits from phase one. Speculators dive into the market because, in addition to their love of short-term investments, they are not nearly as worried about risk. Obviously, this investment strategy is dangerous, and speculators who get too risky don’t typically last long.
However, their investments during the third phase of a bear market help boost market prices enough for the fourth and final phase. It’s important to note that all prices don’t increase during phase three, just the ones that speculators invest in.
Finally, in the fourth phase of a bear market, stock prices decrease, but they do so very slowly. As prices drop and economists start promoting the good news that surrounds the market, investors begin to reenter the market. At the end of a bear market period, a bull market takes over.
What Assets Do Well in a Bear Market?
Remarkably, some asset classes increase in value, or at the very least, hold their current value during a bear market. Therefore, it’s crucial to research recent bear markets to see which asset classes and stocks performed well in the most recent bear markets, as it can give you a good idea about what to do with your money now. Remember, projections are important, but savvy investors also refer to history when deciding what they will do with their money.
While some investors sell out during bear markets and wait for things to turn around before reinvesting, others look for certain types of assets that seem to do well in adverse market conditions. One such example is gold and precious metals. In some of the most recent bear markets, gold, silver, and other precious metals have outperformed expectations, making them an attractive asset class for investors.
Food and personal care stocks also generally perform well during bear markets. Many economists believe that this is due to the pessimistic mindset that many investors have during bear markets. When people think that the market will take a downward turn, they often go into some variation of a “prepper” mindset, causing them to put money into food and personal care.
There is also an inverse correlation between stocks and bonds in a bear market. This means that when the price of stocks goes down, the price of bonds goes up, meaning that investors often flood the bond market to protect themselves against the stock market’s declining prices.
There is also historical evidence of health care investments and investments in utilities doing well in a bear market. However, real estate is the other large investment class that many investors turn to during bear markets. While stock prices may decrease, this rarely directly impacts the housing market. Whether they’re buying or renting, people still need homes, and businesses still need spaces to operate in during a bear market. This makes real estate investing a viable option for investors who want to stay active during a bear market.
Is Real Estate a Good Investment During a Bear Market?
In short, yes. Real estate is one of the few asset classes that continue to produce profits during a bear market. While many investors have a bad taste in their mouth after the real estate crash of 2007, which occurred during a bear market, the fact remains that real estate has been a historically solid investment class for investors who want to keep their money in the market during a bear market.
According to economists, there have been 20 bear markets in the United States since 1952. Obviously, the one that took place beginning in 2007 and ending in 2009 hurt the real estate industry. However, of the remaining 19 bear markets, real estate values increased in 18 of them. Additionally, in the one bear market that saw a decrease in real estate, the decline was only 0.4%.
That means that in 90% of the bear markets that have taken place in the last 70 years, real estate has proven to be a good investment. Additionally, the Case-Shiller Index teaches us that real estate produced a 4.6% annualized return in bear markets since 1950.
Should You Invest in Real Estate in a Bear Market?
The answer to this question largely depends on your investment strategy and financial goals. If the benefits of real estate investing don’t fit into your personal strategy, you shouldn’t invest in real estate in a bear market or at any other time. However, suppose you believe that investing in real estate could help protect your portfolio, and you have the funds necessary to add real estate to your portfolio. In that case, you should most certainly consider real estate investing during a bear market.
How Do You Profit From Real Estate in a Bear Market?
The process of profiting from real estate during a bear market isn’t really all that different from profiting from real estate during any other market conditions. The most important aspect of succeeding with real estate investments during a bear market is simply finding the right kind of real estate holdings to add to your portfolio. Doing adequate research on any subject properties should be a part of your real estate investment strategy, regardless of your market conditions. Due diligence is an important aspect of finding success in any investment class, including real estate.
You profit from real estate during a bear market because it is a less volatile market than the other asset classes available to you. First, however, you must follow some practical strategies to ensure that you’re putting yourself in the best possible position to succeed in the real estate industry.
Bear Market Real Estate Investing Strategies
While the process of doing your due diligence on any potential investments remains the same, there are some strategies that you will need to consider during a bear market. Remember, a bear market is not a normal market, meaning that the economy as a whole is operating under different parameters.
If you’re going to find success with your real estate investing, you must modify your strategies to put yourself in a position to succeed in a different type of market.
First of all, keep your expectations realistic. Your real estate investment’s value will probably not grow rapidly during a bear market, as there are still external factors that have to be taken into account. For example, suppose you think that transitioning your money from the stock market to the real estate industry is going to result in rapid profit production. In that case, you are going to be sorely disappointed. However, you can make good money in a bear market by using real estate if you’re willing to invest in a property (or multiple properties) while tapering your expectations. Remember, your money can grow over the long haul, even if you don’t see any significant profits early on.
Another aspect of protecting yourself in a bear market is to avoid the temptation to overinvest. When the stock market starts declining, it’s easy to have a kneejerk reaction, pull all your money out, and dump it into real estate. Kneejerk reactions are never good for investors, as they are simply reactionary. There are times when you need to react, but overinvesting is an unhealthy reaction that will almost always have a negative impact on your portfolio. If you want to take some of your money out of the stock market to invest in real estate, that’s certainly a good idea. However, taking things to an extreme and putting all of your money in real estate can end up negatively impacting your portfolio. If you want to make a move, do so. But you should be sure that you’re doing so at a reasonable pace.
Finally, it’s crucial that you don’t allow yourself to panic. When you’re shopping for real estate during a bear market, you will not only have to decide what to buy; you will also have to decide when you’re going to buy it. Taking a hard look at the market as it currently stands and the long-term projections can help you have an informed approach about when you’re going to buy a certain piece of property.
So, Is Investing in Real Estate in a Bear Market the Right Choice for You?
Bear markets are an unavoidable part of the natural economic cycle. There will always be times when the market is more conducive to one type of investment than others, and certain asset classes hold earning potential regardless of the market conditions that you’re experiencing.
Ultimately, the most successful investors in the world are those who have found a way to strike a balance between taking calculated risks and being cautious with their money. When facing an economic downtrend like those that occur during a bear market, it’s vital that you adjust your strategy. However, it’s equally important that you don’t make such a dramatic adjustment that you do long-term financial damage to yourself and your portfolio.
Real estate is most definitely a viable option during bear markets. Knowing how to look for the right kind of properties and how to taper your expectations and projections can put you in a position to succeed, regardless of the market conditions.
So now you’re thinking about investing in real estate in a bear market. Don’t go alone. Learn how our investing experts at Alliance can help.
Founder & CEO | Alliance Group Companies
Ben Reinberg is Alliance Group Companies' founder and CEO.
Since 1995, Alliance Consolidated Group has acquired and invested in medical properties with net leases between $3 and $25 million across the United States. With decades of commercial real estate experience, we take pride in committing to meeting the goals of our Sellers, as we consistently and seamlessly adhere to successful closings.