Strategies for Investing During a Market Downtrend

Investing during down markets takes focus and fortitude. Most investors understand the simplified concept of “buy low and sell high”, but human nature can create doubt and frustration when you don’t see the positive returns you’d like. When looking for investment opportunities during a down market, it’s important to not only look at what and when to buy, but also how. Here are several investment strategies to consider.

Dollar Cost Averaging (DCA) is the practice of systematically investing equal dollar amounts over regular periods of time regardless of price. Most investors use this strategy within their 401(k) through payroll deductions. As prices fluctuate, by employing a DCA strategy you’re reducing the overall impact of volatility on your portfolio. With each investment the asset you’re purchasing will vary in price, which reduces the risk of trying to time one lump sum purchase. A DCA strategy can be especially effective in a volatile market when prices are rapidly going up and down.

Real Estate Investing During down markets, investors often look outside of traditional asset classes like stocks and bonds for opportunities. Investing in Real Estate can be one such strategy. One way to invest in Real Estate is through REITs or Real Estate Investment Trusts. REITs allow individuals to invest in large scale assets like office buildings, shopping malls, and apartment complexes without having to actually go out and buy commercial real estate property. In addition to the lower capital entry point, REITs typically provide income in the form of dividends to its shareholders.

Another way to invest in Real Estate is through residential property. Investing in residential property is accomplished when the asset is not owner occupied. In the residential real estate asset class the owner is looking for financial gain through appreciation of the property’s value or rent from the property’s tenants. Owning rental properties takes on many considerations including outsourcing the property management and affiliating with vacation rental companies. Real Estate asset classes provide a wide range of opportunities including property types, stages of development, and locations.

Buying Put Options If an investor is truly bearish on a stock or ETF they own, one strategy is buying a put option. Buying a put gives the owner the right to sell the underlying security at a pre-determined price. Using a protective put option can provide a hedge against a long position since the owner has the right, but not the obligation, to sell at a pre-determined price which may be higher than market prices if the value of the security drops. Keep in mind, derivatives carry their own set of risks and buying a put includes paying the price of the premium.

Diversification aims to have investments spread out between different asset classes with the intent to minimize the risk of loss to an overall portfolio. It’s critical to analyze each investment and calculate their correlations to ensure a portfolio is strategically diversified for adequate risk management. Positions that have low or negative correlations tend to counteract and move in different directions. The goal of risk management through diversification is to provide as much downside protection while maximizing potential gains. The thesis being if one area of your investments is underperforming, another area should be doing well to offset the loss.

Investing in volatile markets can be unnerving if you haven’t included strategies for deploying cash during market downturns. Developing a proper financial plan can help weather the ups and downs of market volatility and keep your long-term financial goals on track.