Hourglass on a laptop

We don’t know when and we don’t know how … but the bear is coming. The next bear market (aka, down market), that is. That’s the prevailing wisdom of many financial experts who have been predicting a slowdown in the stock market for more than a year now.

They’re likely correct. The U.S. is currently experiencing the longest bull market in history, and bear markets have historically followed long-term growth. That history, coupled with recent stock market volatility, trade wars, and tariffs all add to speculation that a bear market is fast approaching.

Although there’s no way to know exactly when the stock market will take a turn, you can prepare your portfolio by determining what a bear market means for your investing strategy and long-term goals. Are you going to keep investing money in stocks? Sell and buy bonds instead? Go all in on gold?

Let’s look at a few of the approaches you could take when the market experiences a downturn.

#1 Stay the course

Chances are, you might not think about your investments on a daily basis. After all, you’re probably like many Americans who invest in an employer-sponsored retirement account, like a 401(k) or a 403(b). These investments are simple: You decide what percentage to have automatically withdrawn from your paycheck (most financial advisers suggest 15% to 20%), select your investments, and the rest is taken care of for you.

This type of automated investing can be referred to as dollar cost averaging, which is a strategy when you invest the same amount of money on a regular basis — regardless of stock price. This means that 15% of your salary might buy five shares of stock one month, but only three the next. Some other month, that same amount could be enough to purchase eight shares.

Pro tip: If you don’t have access to a retirement fund through work — or you’ve maxed out your annual contribution — you can set up a similar recurring investment in any investment account, including an Ally Bank Individual Retirement Account (IRA).

Dollar cost averaging isn’t about optimizing your strategy for a bear or bull market or even trying to find the best value. It’s a strategy that’s proven successful for long-term investors who believe the stock market’s average annual return (10% since 1926 for the S&P 500) matters more than market volatility or whatever’s happening in the current economic cycle or the news each day.

#2 Tilt or shift your investments

Diversification is the key to a well-balanced portfolio, which is why you’re encouraged to adjust your asset allocation (i.e. how your money is divided between investments, like stocks and bonds) based on your age or the number of years until you retire.

Since bonds are historically less volatile than stocks, it’s possible you keep more of your money in bonds than stocks. That’s because this reduces your risk and helps to ensure the majority of your portfolio could remain intact. If you’re a younger investor, on the other hand, your portfolio might hold more stocks than bonds since you have more time to weather market volatility.

Of course, other circumstances — like bear markets — can affect your asset allocation.

If a down market makes you nervous, investing in stocks might not feel like a safe enough bet. Consider reallocating your portfolio to include more bonds than you typically would own. While stocks have returned an annual average of 10%, research by Morningstar found that long-term government bonds have returned between 5–6% annually.

You might also want to think about shifting more of your investments into stocks that pay dividends. Some stocks pay dividends regularly, so this strategy can give you the ability to receive some cash flow from your investments even if the market is lagging.

#3 Keep your money in cash

No, we don’t mean stashing it underneath your mattress. But, it’s a good idea to consider your cash flow anytime you are considering making changes to your investment strategy.

Risk accompanies investing in the stock market, but there are plenty of safer alternatives for your money including savings accounts and certificates of deposit (CDs). An Ally Bank Online Savings Account and various Ally Bank CDs feature competitive interest rates — meaning you could boost your bottom line and avoid the major down swings of a bear market at the same time.

#4 Go for gold

Gold has been a popular investment for decades and some find it to be an attractive investment during bear markets. Consider its performance during the Great Recession: The S&P 500 dropped about 37%, while the price of yellow metal increased by 24%.

If fact, when stocks first began to drop in late 2007, gold actually went up 30%. (And though it tumbled down 10% at one point, it never experienced nearly as significant a price drop as stocks did.)

Investing in gold is different than buying gold coins or gold bricks. (We’re looking at you, Ron Swanson.) You can add gold to your portfolio by investing in gold trusts, mutual funds, and/or exchange-traded funds (ETFs).

#5 Land a deal

You could view a bear market as a chance to buy low.

This is called averaging down, which is when you buy additional shares in a company at a lower price than your original purchase price. The idea behind averaging down is that it reduces your overall cost basis in a stock (your initial investment), which can limit your future capital gains — and lower your tax bill.

This can be a good way to potentially make more money, but it also carries greater risk. The stock price might never recover, increasing your loss.

Pro tip: If you’re interested in averaging down, it’s smart to plan ahead. Identify individual stocks you’d like to purchase and save money in a separate account. That way, you’ll have cash on hand when the prices start to drop.

Pick the approach and risk tolerance that’s best for you

There’s no one surefire way to beat a bear market. But it helps to plan your investment strategy in advance to avoid of-the-moment panic when shifts occur. Knowing your options and revisiting your long-term goals and risk tolerance from time to time can help you develop an investment strategy that gives you peace of mind as stock prices sag and market volatility becomes headline news.

What’s your investment approach? Explore your options, and we’ll take care of the rest!

Learn more about Ally Invest Managed Portfolios