How Millionaires Invest During a Bear Market

Adopting a millionaire mindset can help you avoid emotional decision-making as you wait out stock market bumps.

A bear market -- signified by a 20% or more drop in stock prices -- can be easier to weather when you're properly diversified and in it for the long haul. Berkshire Hathaway (ticker: BRK.A, BRK.B) CEO Warren Buffett is a prime example of how to invest like a millionaire (or in his case, billionaire) during all market seasons, periods of recession or times of increased volatility. Buffett has compounded capital at more than 20% annually for the last 50 years.

"Oftentimes, investors can be questioning their investment strategy or their planning," says Monica Sipes, partner and senior wealth advisor at Exencial Wealth Advisors in Frisco, Texas. "They understand that the math works in their favor in a bear market, but it can be emotionally testing."

[Read: How to Invest in a Bear Market as a Beginner.]

Developing some coping mechanisms that mimic how millionaires invest in a bear market can help you maintain stability and consistency in your investing strategy.

Here are some of the best tips to growing wealth like a millionaire:

-- Resist the urge to run.

-- Think big, act small.

-- Automate your investments.

-- Know what you own.

-- Limit your losses.

-- Keep bear markets in perspective.

Resist the Urge to Run

At the first sign of a bear market, you may be tempted to begin selling off stocks to minimize losses. As it happens, that approach is counterintuitive to the millionaire mindset.

"Investors need to be able to hold on to their investments during an economic downturn or bear market," says Marc Doss, regional chief investment officer for Wells Fargo Private Bank in San Diego. "Some investors sell during a downturn and don't participate in the recovery phase."

Doss says one of the keys to avoiding a forced sell-off is having liquid cash you can rely on when the economic outlook is uncertain.

"Investors can use their cash instead of tapping into their long-term investments during a bear market," he adds.

Think Big, Act Small

During a bear market, investing like a millionaire means staying focused on your objectives while being strategic with your actions.

"Millionaire investors think forward five or 10 years from now," says Clark Kendall, CEO of Kendall Capital in Rockville, Maryland.

That includes considering what the economy and markets will look like, how consumers will be spending money and what the interest rate forecast may hold. They then use that dollars-and-cents thinking to shape the actions they take in the short term.

"They manage risk by making a series of small decisions and know that any decision can be a wrong decision," Kendall says. "But a series of well-thought-out small decisions will typically outperform just one make-or-break large decision."

Many millionaire investors rely on a slow-and-steady approach to portfolio building, says Ryan Shuchman, partner at Cornerstone Financial Services in Southfield, Michigan. "Few and far between are those with substantial assets that came from the 'big wins' in the market."

The lesson here, Shuchman says, is to avoid making "all-in" buy or sell moves since the odds of this strategy paying off tend to be low.

Automate Your Investments

Automating your investments can do two things for you.

First, it ensures that you're taking advantage of the power of dollar-cost averaging and compounding interest consistently over time. Second, it can help you avoid the pitfalls of trying to time the market.

The amount of time an individual spends in the market is more important than timing in the market, says Tim Quillin, a chartered financial analyst and partner at Aptus Financial in Little Rock, Arkansas.

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When investors take their money out of the market, they have to be right twice: when they sell their stocks and when they start investing in the market again.

"The saddest investing missteps we see are when people try to outsmart the market, typically by selling stocks during periods of uncertainty like late 2008 or early 2009, or even December 2018," Quillin says.

Know What You Own

Knowing what you own is good advice for investing like a millionaire in any type of market. The concept of understanding what you bought and why you bought it is a principle that can be attributed to Gerald Loeb, founding partner of brokerage firm E.F. Hutton & Co.

"He was probably the first true speculator in growth stocks because he always analyzed the financials of any company he bought," says C.J. Brott, founder of Dallas-based Capital Ideas. "Loeb then singled out a single reason for owning the stock. The why you own it became a property he called 'the ruling reason' for ownership."

Loeb also adopted the strategy of selling a stock when the reason why it was bought was no longer true. He was able to sell without hesitation, and that mindset kept him from "constantly rationalizing on what might become a losing investment and holding on to it to get even," Brott says. "It also helped him to sell his losers and hold on to the winners as long as the ruling reason was intact."

Limit Your Losses

Rebalancing your portfolio can help minimize losses. It's a critical move, says Peter Roselle, a Treasure Coast, Florida-based equity and options trader.

Roselle is a fan of financial advisors that focus on short selling based on a large amount of research. That's exemplified by David Einhorn, president of New York-based fund management company Greenlight Capital, and Jim Chanos, president of Kynikos Associates.

"You should have been looking at your asset allocation as equity prices rose and adjusting -- the same is true as they fall," Roselle says. "For most people, this will mean adding to the equity portion of the portfolio as declining equity prices result in fixed income becoming a larger portion of your portfolio."

Keeping losses small is a proven rule of winning speculators, Brott says. Commodities wizard Richard Dennis is a good example. It's reported that he grew $1,600 into $200 million in 10 years.

"In order to prove that anyone can learn to trade, he founded the turtle traders and taught a group of neophytes to successfully run small sums into millions of dollars by following the rules," Brott says.

Keep Bear Markets in Perspective

While bear markets can trigger fear, it's important to keep things in perspective.

First and foremost, bear markets don't last forever. And giving into fear can hinder your investment goals.

"Panic selling in a bear market or at the bottom of a bear market often leads to more harm to your investment portfolio over the long term," says Drue Kampmann, co-founder of True Financial Partners in Bettendorf, Iowa.

[Read: 3 Ways to Invest New Money in a Bear Market.]

Kampmann says millionaire investors often have the advantage of experience on their side -- allowing them to view bear markets in a different light. This leads them to see downturns as opportunities to buy assets at a discount, which can pay off later when stock prices begin to rise.

You can take the same millionaire investing approach by looking for entry points instead of making a beeline for the exit.

"Set aside the emotion and look at a bear market from an opportunistic perspective versus one of fear," Kampmann says. "Historically, the best days in the stock market follow some of the worst days in the market."

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