How to invest during a bear market, according to investment advisors

At least that’s what JPMorgan Chase CEO Jamie Dimon said earlier this month at an annual conference sponsored by AllianceBernstein. Dimon, often considered the voice of the banking industry, is just one of many Wall Street titans painting a less-than-rosy economic picture. 

From hedge fund billionaire Leon Cooperman to Morgan Stanley’s CEO James Gorman, bearish predictions about a continued economic downturn, or even an outright recession, have flooded headlines in recent months.

That’s not exactly surprising given the macroeconomic woes facing the nation. Rising consumer prices continue to be a thorn in the side of the Federal Reserve, with inflation hitting a fresh four-decade high in May despite multiple interest rate hikes. The war in Ukraine is wreaking havoc on global commodities markets, pushing the prices of food and fuel to unsustainable levels worldwide. And now, there are worrying signs of a slowdown in U.S. consumer spending, after retail sales unexpectedly fell last month.

All of these bearish economic indicators and recession predictions have consumers and economists spooked, too. More than 80% of Americans believe a recession will hit this year, and 70% of leading economists polled by the Financial Times last week said they expect a recession by the end of 2023.

On top of that, the S&P 500 is now down more than 23% since the start of the year after officially entering a bear market this week.

For stock market investors, these are trying times, to say the least. But it’s important to remember that bear markets aren’t the end of the world. In fact, they’re a normal part of how the stock market operates.

From the end of World War II through last year, the S&P 500 has experienced 14 official bear markets, or one every 5.4 years on average. The most successful investors understand that bear markets can be navigated without panic, and may even present opportunities.

Here’s what several top investment advisors and wealth managers recommend investors do to avoid major losses and make it through this year’s bear market.

Stick to a long-term investment plan that fits your goals

The first and most important tip for any investor looking to weather a bear market is to stick to a long-term investment plan. 

“Assuming that a client has a well-thought-out investment plan that is consistent with their goals, objectives, time horizon, and risk tolerance, they should stay the course,” Gerald Goldberg, CEO and co-founder of the investment advisor GYL Financial Synergies, told Fortune.

Consistent doom and gloom headlines are common during bear markets, but seasoned investors understand that it’s important to ignore the noise and focus on long-term returns.

Over the past decade, barring brief blips in 2020 and 2018, finding successful stock market investments wasn’t exactly a challenge. After all, the S&P 500’s average annual returns over the past decade, not including 2022, were roughly 14.7%. That’s led many younger investors to become undisciplined in their approach to investing.

Instead of focusing on long-term goals like retirement, building up enough money for a down payment on a home, or paying for kids’ education, these short-term focused traders often want to quickly change strategies amid a bear market, hoping to “protect their portfolios” or maximize profits. 

But the reality is, if a bear market has already begun, it may be too late to change your asset allocation without locking in serious losses. Remember, the tech-heavy Nasdaq is already down 32% this year alone. 

Financial advisors recommend investors trust that their financial strategy will work over the long-term as it was intended.

“In our view, closing the proverbial barn doors after the horses have run out, by somehow deciding that now is the time to ‘protect’ portfolios, is part of the reason that so many investors end up with mediocre long-term returns,” John Buckingham a portfolio manager at the investment firm Kovitz, told Fortune. 

“History shows that those who have patience and discipline can mitigate the risk of permanent loss of capital (i.e. protect their money) by increasing the length of their holding period. The key, of course, is to ensure that short-term-oriented dollars [a.k.a. the money you need for expenses] are not invested, so that stocks can be held through thick and thin,” he added.

Inexperienced investors often forget their financial plans when stocks are falling, but investing shouldn’t be an emotional game.

“Avoid acting out of emotion and not logic. A knot in your stomach is not a good sell signal!” Emerson Ham III, a senior partner at the wealth management firm Sound View Wealth Advisors, told Fortune.

Avoid timing market entries and exits

Another key to bear market investing success is to avoid trying to time market entries and exits. 

“Attempting to time the market is a fool’s errand,” GYL Financial Synergies’ Goldberg said. “For every investment undertaken, you need to be right not just once but twice (entry and exit).”

Goldberg noted that while the current price of a stock and its relative valuation to industry peers does matter, retail traders often make mistakes when they attempt to avoid bear markets by selling shares.

“As we like to say, the only problem with market timing is getting the timing right. Yes, some may be able to get out ahead of a downturn, but the truly difficult task is knowing when to get back in, as stocks usually begin sharp moves higher when conditions look awful,” Kovitz’s John Buckingham said.

Buckingham noted that, historically, the average investor is often the most bearish ahead of stock market rallies, making them unlikely to invest at the right time to maximize profits. That may mean it makes more sense to dollar cost average—or invest a fixed dollar amount on a regular basis regardless of the share price—into stocks with strong fundamentals, rather than timing big entries and exits. 

“By our way of thinking, if there were changes to be made in an asset allocation plan, we would be steering money toward equities as stocks fall as opposed to hoping that we could have success jumping out and back into stocks,” Buckingham said.

Retail investors often believe they can outsmart the market and make a killing by moving in and out of stocks, but investment advisors say they’ve seen it all before, and timing market entries and exits rarely leads to outsized returns.

“Avoid the temptation to try to be a market timer. You already didn’t sell out at the top, so what makes you think you will have the foresight and fortitude to buy back in at the bottom?” Ham III said. “I have never seen anyone do this with enough consistency to add value over the long run. Never in my 30-plus-year career.”

Look for value, cash flow, and quality

For people who have some extra money and are looking to invest during a bear market, there are some key traits to look for. Firms with consistent cash flows, strong balance sheets, and, in this inflationary environment, pricing power, are likely to outperform.

Buckingham also recommended looking at so-called “value stocks” in the current environment.

“Historically speaking, stocks that trade for more inexpensive valuations have outperformed those that trade for richer valuations, or growth stocks, so I always think that gravitating toward the former makes sense. And that goes double for when the Fed is tightening [the money supply], and in higher interest rate and higher inflation environments,” he said.

With so many investors concerned about the economy’s future and falling earnings, it may also make sense to invest in companies that offer dividends and avoid unprofitable firms, Buckingham added.

One key tip here is to look at a firm’s dividend payout ratio, or the total amount of dividends paid to shareholders compared to that company’s net income, before making an investment. A high payout ratio can be an indicator that a company will be unable to maintain its dividend if earnings fall.

Sound View Wealth Advisors’ Ham III also recommended looking at “high-quality” companies that have consistent cash flows, make a reliable profit, and aren’t overburdened by debt.

“A wonderful piece of advice given to me early in my career was to always come out of a bear market with a higher quality portfolio than you entered it,” Ham III said. “It can be a wonderful time to buy some of those great companies that you have always wished you owned.”

Finally, it’s important not to give up on companies that have what Ham III calls “secular tailwinds” that could help propel them in the future, especially when the current bear market ends. While many investors are abandoning tech stocks, he argues it may make sense to look for quality companies in sectors that have been recently beaten down.

“In an environment like this, the market tends to throw out the bathwater, the baby, and the tub as well,” he said.