Bear markets are a tough pill to swallow for even the savviest of investors. It doesn't matter if you have $1,000 or $1 million invested, losing money hurts. It hurts when the economy is in decline even more. If you give in to your fears, you might consider bailing out on your investment plan completely, which can do more damage than anything else.
The key to making it through a bear market without losing sleep comes from the construction of your portfolio. You probably have a portfolio that consists of a number of mutual funds, ETFs, stocks an bonds. Together, this eclectic mix is designed to achieve a certain goal. Whatever your financial goals, you want to make sure your investments are doing what you intended.
If you have taken the time to create an investment mix that is suitable for your risk tolerance and investment objective, then a bear market shouldn't concern you. Losses and gains are a part of the investment game.
But if you find yourself in a situation where you become uncomfortable with the losses in your portfolio, that is a sign that you probably aren't invested according to your risk tolerance. This commonly happens when investors get overly aggressive in a bull market, and suddenly find themselves turning conservative once losses start to show up. Avoid the temptation to alter your investments based on what the prevailing markets are doing.
You may want to consider investing some money in ETFs or mutual funds that are designed to go up when the market goes down. These investments could then offset some of the losses elsewhere in your portfolio.
The problem is that since these investments try to do the opposite of what the underlying market does, if stocks start to go up again these funds are going to go down. It's a double-edged sword, and using this strategy can introduce even more risk to your portfolio than you expected.
Defensive stocks don't mean companies in the defensive sector, but refer to generally larger companies that are better suited to withstand a prolonged bear market. Common traits for defensive stocks are companies with strong balance sheets that have been in business for a long time. Smaller and younger companies may not have the financial stability to weather a bear market, so you can minimize the impact of a declining market if you're concentrated on larger and more stable companies.
Whatever your strategy, remember: don't get anxious and make foolish decisions. If you feel too stressed out to make a solid decision, get the advice of a trusted friend or adviser. Don't forget that no decision, however big or small, will stick with you a long time financially.