Practical analysis for investment professionals
28 August 2015

Tips on How to Manage Money in a Bear Market

One of the biggest challenges for investors is managing money well in a bear market. Are markets going to go down further? Are they going to rebound? Most importantly, what do I do? Here are several tips to make it easier to manage money during a downturn.

Tax Harvesting

Cash is good to have on hand because it serves as a buffer against losses and allows you to buy great companies at lower prices. I know what you are thinking: If I knew that the market was going to decline so far and so fast, I would have cash on hand, but what do I do now? The good news is that many governments around the world allow capital losses to offset against gains. In effect, this means governments help to cushion the blow. So if the laws in your country allow capital losses to be used to reduce taxes, then make sure to harvest your losses if a bear market ensues.

Critically, you need to evaluate the prospects of these companies before selling. Ask yourself: Could this capital be reinvested to earn higher expected returns versus risks? If the answer is yes, then you have just discovered a cash source.

Coupons and Dividends

You can also invest in assets that pay you cash, too, namely coupons on debt instruments and dividends from stocks. Again, this cash provides you with some downside protection if volatility’s growl starts to sound like a bear. For example, a 5% dividend yield is also a 5% cushion against losses. Additionally, in a bear market, if the fundamentals of a security remain strong but the market price declines, then yields go up. In effect, you can buy yield protection more cheaply. It is particularly important to truly do your fundamental analysis to ensure that that coupon or that dividend can be paid. Regarding dividends, many strong companies also continue to increase their dividends per share, even in a bear market. Asymmetric returns relative to risks is the name of the game.

Companies with High Cash Balances

One backdoor way of having a portfolio rich in cash is to invest in companies that themselves have high cash balances on their balance sheets. Just like in your own case, businesses with cash are also able to cushion the blows from a weakening economy and to also selectively acquire other businesses cheaply to improve their competitive position. Better yet, the company may invest those cash balances in new, higher growth projects (though few companies seem to want to these days). Last, companies with high cash balances can also return money to you directly by paying off debt, and thus increasing profits; buying back outstanding shares; and even paying a dividend. All of this cash can only benefit an investor in a bear market.

Pay Attention to Industry Fundamentals

If the market is in full, growling-beast Kodiak mode but the economy has not worsened, there are harbingers of downturn that you should be aware of. One potential leading indicator is the weakest company in an industry. Weak firms usually begin to struggle before the entire industry struggles. This may give you an advance warning of impending doom.

One additional industry fundamental to track is the sales results of companies that sell the latest and greatest consumer marvel. Usually these goods — like new and expensive smartphones and televisions — are not necessary. When sales of these types of goods slow, it usually signifies a downturn is well underway. Also, while we are on the subject, consumer confidence, in my experience, is the least reliable early warning system of recession. Instead, consumer confidence tends to lag by a significant period of time.

Asset Allocation

Does your investment charter allow you a little flexibility? Say, if you are an equity manager, can you have some small portion of your assets in preferred stocks or fixed income? My point is that if you like a credit, and by that I mean a cash-paying entity, you can change where in the income statement you own a claim on the cash flow. Moving up the income statement can mitigate the damage from a bear market but still ensure access to the prospects of the credit. This is especially true for convertible securities, but even vanilla debt securities can receive a credit rating upgrade that may drive capital gains while you wait out the bear market environment. From my perspective, you have already done the work of analyzing the business, why not make your entry into their capital structure slightly more conservative?

Buy Companies That Focus on Return on Invested Capital (ROIC)

There are many numbers for management of businesses to target. My favorite is return on invested capital (ROIC). Though I may be a throwback, I still like it when company management is constantly focused on managing capital for highest return and treats it as precious. When management thinks this way then equity market downturns are likely advantageous for these firms relative to competitors. They typically deploy cash in a sophisticated fashion. That is, they manage money the way I try to manage money.

Bear markets are no fun. As Shelby Cullom Davis is famous for saying, however: “You make most of your money in a bear market, you just don’t know it.” He means that prudent investing has outsized rewards when executed in stock market downturns.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Voss also sub-contracts for the well known firm, Focus Consulting Group. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: [email protected]

17 thoughts on “Tips on How to Manage Money in a Bear Market”

  1. Ashraf Bava says:

    very simple and excellent article Jason.

    1. Hello Ashraf,

      Thank you very much, that is one of the things for which I strive: simplicity!

      I hope that you are well,


  2. Ravikant Natani says:

    Jason, Really the material was very informative and helpful. Thank you !!

    1. Hello Ravikant,

      What nice words to read this morning here in the US. Thank you!


  3. Karla Cabrera says:

    I’m a finance student sir and I have always found your articles really helpful. Kudos to you, sir.

    1. Hello Karla,

      Thank you! I am very pleased that my writing is helpful to you.

      Best wishes for success in your studies,


  4. Sorin ROibu says:

    Great article with excellent yet easy to follow insights.
    Thank you

    1. Hello Sorin,

      Thank you very much for the positive feedback and for taking time to share it!

      Yours, in service,


  5. Hua Chia Yee CFA says:

    Great article, Jason!

    Also just read your book, The Intuitive Investor. Strongly recommend it to anybody who has a keen interest in investing and who intends to earn a living off it.

    1. Hello Hua Chia,

      Thank you for your very kind words. It brought a smile to my face to read your praise of The Intuitive Investor. I am so glad that you liked it!

      Yours, in service,


  6. Judy Wilson says:

    I thought that your advice for asset allocation for better wealth management could be useful for me to know. I’ve been wondering if it would be best to move up my income statement. I didn’t realize that doing this can mitigate the damage from a bear market while allowing me to have access to prospects of the credit, so I might consider this option. Hopefully, doing this will help me manage my assets better in a bear market.

    1. Hello Judy,

      Thank you for your comment. I certainly wish you the best success with your investment management! Go Judy, go! I hope that I have contributed in some small way.

      Yours, in service,


  7. I appreciate your information on asset allocation. This is something that I should probably keep in mind, because it would help me a lot to have control over where in the income statement I own a claim. It is also a good idea to look for the return on invested capital, I will keep this in mind. Thank you for all of the helpful tips for investing!

    1. Hello Brooke,

      Thank you for taking the time to share such a generous comment. I am pleased that you find these investment tips useful!

      Yours, in service,


  8. Oak Laurel says:

    Hi Jason, great article. There is too much focus on capital gains and jumping on a stock that is going up instead of focusing on the fundamentals.

    1. Hello!

      I am really pleased that you liked the piece. I hope it helps you during a downmarket : )

      Yours, in service,


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