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Bear Market

How to Navigate a Bear Market as an Investor

Bloomberg has officially declared the stock market a bear market, but what does that mean for real estate investors? The definition of a bear market is a series of prolonged declines in an investment market. Typically, a securities bear market is not declared until the market has fallen 20 percent or more from its most recent high. This is often accompanied by widespread pessimism and negative investor sentiment. 

The S&P 500 ended the first half of 2022 with the largest loss since 1970, a whopping 20.6 percent decline. That’s certainly something to take notice of, but should real estate investors be worried?

Economic Indicators Are a Mixed Bag

While a stock market bear market is an indicator of the direction the economy may be going, it isn’t the only economic indicator worth paying attention to. The Consumer Price Index (CPI), also known as inflation, is another. In May 2022, the CPI rose to 8.6 percent year-over-year, the highest since 1981.

Fuel prices at the pump are 106.7 percent higher than they were a year ago. And food prices have also soared. Inflation is putting the squeeze on a lot of people’s pocketbooks.

Unemployment is steady at 3.9 percent, which is good considering other indicators. However, real average hourly earnings are down 3 percent. If that meant that wages weren’t simply keeping up with inflation, that would be a bad thing, but it’s worse. Wages are moving in the opposite direction from inflation and that’s causing further ripples in the economy.

Retail sales were slightly down in May from April but up by 8.1 percent from the year before.

Gross Domestic Product (GDP) in the first quarter of 2022 was down an estimated 1.6 percent, but real estate’s portion of that was a slight increase.

Considering these economic indicators, the situation looks bad, but it’s not entirely bleak. There are reasons to remain optimistic regarding real estate investment.

4 Ways to Maneuver Through a Bear Market

Investors should see bear markets as opportunities. Money can be made in a bear market, but it may mean tightening up the discipline in analyzing deals before jumping into them. As always, real estate investors must scrutinize every opportunity and pick the best ones.

First, resist the urge to disengage from the market. If you’re not in it, you can’t win it. In other words, an absent investor is an investor with no gains.

That said, there’s nothing wrong with exercising a little caution. There are four specific ways investors can ensure that investments made are sound and work offensively and defensively to protect gains, mitigate losses, and keep your head above the water.

  1. Employ dollar cost averaging – Dollar cost averaging is an investment strategy that involves buying an asset, or bucket of assets, at periodic intervals with equal amount of investment. In other words, you commit to buying $1,000 of a particular asset every month. Regarding real estate, if you use investment marketplaces, then investing the same amount of money every month in a handful of different deals will spread your risk out among those deals and, in the long-term, minimize your risk to investment volatility.
  2. Re-examine your portfolio allocation – Even dollar cost averaging won’t protect you if you are too aggressive in your strategy or have the wrong group of investments. You may want to shift some of your investment into income assets and away from growth assets, or you may want to increase your real estate holdings to offset losses in your stock portfolio. Only you can determine the proper mix of assets in your portfolio, but now is a good time to re-examine your portfolio to create the right allocation.
  3. Diversify your portfolio – Rather than trying to time the market, diversify the type of assets in your portfolio and spread your investments among various levels of risk. If you’ve been heavily invested in stocks, move some of your investment dollars into real estate or bonds. Diversification is the best protection against cataclysmic losses.
  4. Position yourself with strategic hedges – If you are a house flipper, you may want to invest in some buy-and-hold properties, or multifamily rentals, to hedge against any potential downturn in the home buying market. 

 
Managing investments in a bear market is not impossible, but investors must watch every dollar to ensure it is invested in the right assets and the right mix of asset types.

Look For Assets That Perform Well in a Bear Market

Some investments traditionally do better, or they at least do well, in a bear market. Precious metals, for instance, have done well in recent bear markets. Food and personal care stocks also typically perform well during bear markets. Another investment that does well is real estate. Of the 20 bear markets since 1952, real estate outperformed the market in all but one of those. Then, in that one, the decline was only 0.4 percent.

Remember, the key to investing in a bear market is to minimize losses and mitigate risk. Here are six tips to help you do that better in this bear market:

  1. Bet on debt – When the stock market is down, debt investments have much better prospects. That means private real estate lending is a golden opportunity.
  2. Increase liquidity – When at all possible, remain liquid. Being liquid means you can move your money faster and take advantage of opportunities more quickly. It also ensures you have positive cash flow during a time when you may need it the most.
  3. Don’t overinvest – When you do find the right opportunity, don’t overinvest. It’s critical that you remain in the market, but don’t invest too much money into any one deal.
  4. Maintain realistic expectations – Gains will not increase as rapidly in a bear market. That’s why it’s important to keep your expectations realistic.
  5. Don’t panic – Investors make their biggest mistakes when they panic.
  6. Look for undervalued properties – Undervalued properties still exist in a bear market, and in an environment with rising prices. Move quickly on the right deals, but don’t move so quickly that you don’t analyze deals properly.

 
While the real estate market is cooling, it isn’t crashing. There is still a lot of competition, low housing inventory, and a climate of rising prices. There is still pent-up demand in some geographic markets, so the deals are there. But investors must look harder for them. Keep your head and make sure a deal makes sense before you invest in it. This bear market, like all others, will soon pass.
 

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