Is investing in a bear market a smart investment strategy? Do alternative investments do better than other investments in this kind of market?

How do you find the best investments for your portfolio? Find some of the answers and insights here.

What is a bear market?

A bear market is the opposite of a bull market. That means if the market falls by 20% or more from the 52-week high, it becomes a bear market.

The cause of a bear market can be multi-faceted. Sometimes, it’s investor fear or uncertainty, causing people to be more risk-averse than risk-seeking.

While the global COVID-19 pandemic caused the short-lived 2020 bear market, other historical causes have included widespread investor speculation, irresponsible lending, oil price movements, over-leveraged investing, and more.

However, investor pessimism is just one of the things that can cause a bear market.

The Causes of a Bear Market

There are a number of things that can cause a bear market, but a bear market generally occurs when the markets are experiencing:

• A sluggish economy;
• Bursting market bubbles, like the dot.com bubble that burst in 2000;
• A pandemic or global health crisis, such as COVID-19;
• Wars and other global conflicts;
• Geopolitical crises;
• Drastic changes to the economic paradigm, such as moving to an online economy.

These are just a few things that send the market into bear territory.

What exactly are alternative investments?

Unlike traditional investments, like stocks, bonds, equities, and cash, alternative investments don’t fit neatly into conventional investment classes.

Many investors tend to associate “alternative” with “volatile” or “high-risk.” In addition, alternative investments can be more challenging to navigate and are often not as liquid.

In reality, alternative investments can provide similar, higher, or lower returns than stocks or bonds but can potentially offer significantly reduced volatility.

This is because alternative investments are not directly correlated to the rise and fall of the stock market.

The most common alternative investments include real estate, pre-IPOs, private equity/venture capital loans, hedge funds, and contracts, like futures.

Understanding the Pros and Cons of Alternative Investments

Knowing the type of alternative investment you’re putting your money into and understanding the upsides and downsides of each can help you make more informed decisions.

Some Pros of Alternative Investments:

• They may provide similar or higher returns with less volatility.
• They may not react to cyclical ups and downs.
• They can potentially be a good way to protect your portfolio.

Some Cons of Alternative Investments:

• Higher minimum investment requirements;
• Higher fees;
• Less liquidity;
• Lack of regulation.

So, are alternative investments a smart choice when considering investing in a bear market? The better informed you are, the better your likelihood that you will make balanced choices for your portfolio.

The bottom line? When investing in any alternative investment, it is important to do your homework and enlist the help of a professional advisor. Then sit back, relax, and enjoy the ride.

Is Real Estate a Good Alternative Investment in a Bear Market?

Real estate can be a practical option during bear markets. Historically, real estate investments have delivered stable, consistent returns for decades.

According to USA Today and many other experts, real estate is one of the few investments that continue to produce profits during a bear market.

While the real estate crash of 2007 created a bear market that left many investors more than a little wary of alternative investments (especially real estate), it’s important to remember that was the exception, not the rule.

The fact is, since 1952, there have been 19 bear markets. Other than the Housing Market Crash from 2007 and 2009, the Case-Shiller index shows the value of alternative investments increased in every other case. During the housing market, alternative investments declined only 0.4% on average.

This is proof that real estate has consistently proven to be a good investment over the last seven decades.Gray Cardiff, the editor of the Sound Advice newsletter, has another reason to invest in real estate. According to the Hulbert Financial Digest's performance monitoring, his newsletters model portfolios have beaten the market over the long term.

And over the last 20 years, his newsletter’s model portfolio has beaten the dividend-adjusted Standard & Poor’s 500 by 1.3 annualized percentage points.

Across multiple major real estate sectors (retail, industrial, apartment, and office, for example), property values could rise, produce income, and potentially enable real estate investors to outpace inflation.

Other Things to Consider With Alternatives in a Bear Market

One good reason to invest in real estate in a bear market is its lower volatility as compared to investments like stocks and bonds.

Another is its historically good performance record. But if you want to come out ahead in your real estate investments, you might have to adjust your investment strategies.

Especially since, unlike a normal market, a bear market operates under an entirely different set of constraints.Some other important things to think about:

• Do your due diligence. While that’s true of any investment you make, it’s even more important in a bear market.
• Be realistic and keep your expectations realistic. Your real estate investments probably will not grow rapidly in a bear market, but you can potentially make a good profit by investing in real estate over the long haul.
• Be careful not to overinvest. While it might be tempting to move your money from stocks to real estate during a bear market, taking things to an extreme can hurt your portfolio. Pace yourself.
• Stay calm. Understanding the market and its long-term projections helps you maintain a more informed approach to investing in real estate in a bear market.

An experienced financial advisor can also assist you with your alternative investments.

How to Invest in a Bear Market

Sure, bear markets can be scary for investors. But they can also present opportunities to put money to work for the long run while stocks are trading low.

With that in mind, here are some rules you can use for investing in a bear market:

• Focus on quality.
• Think long-term.
• Don’t try to catch the exact bottom; it’s nearly impossible to do so.
• Build your portfolio gradually.

If you start by following these simple rules, you’ll be better positioned to reap the rewards that can come when investing during a bear market.

Can investing in real estate in a bear market work for you?

Bear markets are simply part of the natural economic cycle. But consider this: While stock prices may decrease, this rarely directly impacts the real estate market.

Whether 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 good way to stay active during a bear market.

Real estate’s low correlation with public markets and fundamental value is uniquely positioned to weather downturns.

It’s not impacted by changes in the market presenting an opportunity to diversify, reduce overall volatility and create a stronger portfolio, offering downside protection among stocks, bonds, and other assets.”

Of course, the answer to whether or not you should invest in real estate in a bear market largely depends on your personal investment strategy and financial goals.

Get Bear Market & Alternative Investments Guidance from HUDSONPOINT capital

There’s no reason to weather bear markets and alternative investments on your own. HUDSONPOINT capital has the experience and resources necessary to help you build wealth in markets both bear and bull.

‍Contact us to get started.