Bear Markets May Feel Frightening, But Here's How You Can Come Out Ahead

You may not be able to control your initial reaction to the news of a bear market, but you can pause long enough to shift your mindset from "crisis" to opportunity. By using a few straightforward strategies to manage risk and stay in the game, you lay the groundwork for the best future returns.

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Bear markets come, and they go

As unpleasant as they may be, bear markets are a normal part of the economic cycle. Like a tornado or hurricane, they're not fun, but they are normal. There have been roughly 27 bear markets in the S&P 500 index since 1928. However, there have been 28 bull markets -- a reminder that the market does roar back.

The average bear market lasts about 289 days, or 9.6 months. On the other hand, the typical bull market lasts 988 days, or 2.7 years. In other words, if you stick with the market, your portfolio will, on average, spend 241.8% longer growing than contracting.

Historical data show two things: Broad indexes like the S&P 500 have recovered from every prior bear market, and some of the strongest performance days occur during and just after the steepest declines. According to Warren Buffett, downturns are "extraordinary opportunities" because historically, it's never been very long before the market resumes its upward trajectory.

Opportunities await

Bear markets can transform good companies and broad index funds into relative bargains. Dollar-cost averaging -- investing a fixed amount at regular intervals -- means you can buy more shares when prices are low. As the market recovers and values increase, your potential gains are amplified.

However, you only get to enjoy these gains if you keep making scheduled contributions to your accounts throughout a bear market -- a move that requires a cool head and discipline. Sticking with the market by buying the same assets other people are panic-selling at a discount is one of the most powerful ways to come out ahead.

History also shows that investors who maintain this discipline through market downturns tend to outperform those who pause their investments or panic-sell.

Protect yourself

Because you know another bear market is inevitable, you may want to consider investing in sectors that tend to perform better through market downturns than others. For example:

• Consumer staples: Household goods, foods, beverages, laundry detergent, hygiene products, alcohol, and tobacco. Think of products people are unwilling or unable to give up, regardless of the economy or their personal financial situation.
• Healthcare: Healthcare and healthcare-related products also tend to be less affected by market downturns than other sectors. That's because people keep buying essential health products throughout recessions and bear markets.

Procter & Gamble (NYSE: PG) and Johnson & Johnson (NYSE: JNJ) are examples of companies within sectors focused on consumer staples and healthcare. Both have an excellent long-term record of paying dividends, and each is worth considering as you build a bear-resilient portfolio.

You can't prevent the next bear market from occurring any more than you can stop the ebb and flow of the ocean. However, you can be prepared to make the most of it.

Dana George has positions in Procter & Gamble. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.