Not many new real estate investors enter the game with unlimited funds. Most of us need to figure out how to invest in real estate with little money. In fact, some people start investing in real estate with just $1,000.
But that limits your options, so how do you invest in real estate with no money or with little money?
We have plenty of our own thoughts on the matter, but to broaden the ideas, we polled a series of expert real estate investors on their tactics to invest without much money.
Live-in Flips
You know all about flipping houses. But have you ever considered moving into the property while you renovate and flip it?
Liz Hulz from The House Guys explains how she got into flipping: “Finding the seed money for your first project is the first and often the most challenging hurdle to overcome. A good solution is to make your first investment property your temporary home. This method works well for youngsters who have yet to get on the property ladder.
Related: Life-changing real estate investing lessons
At first I was afraid. I was petrified.
That was me at 23, when it came to real estate investing. I was interested in it, and saw everyone around me achieving success with it. But I waited on the sidelines.
By 25, I was still clueless, but now I was concieted, because I thought I knew a thing or two. If there’s anything worse than being paralyzed by your fear and unwilling to act, it’s rushing off the cliff without the parachute of knowledge.
I proceeded to start aggressively buying up properties. I overpaid and then overpaid some more. I didn’t understand how to calculate a rental property’s cash flow properly. And budgeting for CapEx? I’d never even heard of it.
I had no formal training, no coach, no mentor. I learned by trial and error (lots and lots of error). But the good news is anyone can succeed in real estate – if I did it with no training, you can do it with guidance!
Real estate investing remains an excellent way for anyone, not just the rich or impeccably educated, to become wealthy. It requires discipline and finding people to help educate you, neither of which require a Ph.D. or a trust fund.
Here’s what I wish I’d known starting out, that would have saved me hundreds of thousands of dollars in grief.
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If you do this right, you’ll never lose money on a rental property.
If you get cash flow calculations wrong, you’ll end up buying bad investments. You will lose money.
You earn your profit from two things: choosing good investment properties and then managing them effectively. Both need to be present for you to earn money. I’ve lost money from buying a bad investment, even though I later managed it well. I’ve also lost money buying a good investment, because I hired a terrible property manager who mismanaged the property to the tune of $30,000 in losses.
But it starts with evaluating potential properties, and forecasting their cash flow.
New investors get cash flow calculations wrong because they think in terms of “What will the property earn me in a normal month?” But that’s not how rentals work; in a normal month, your cash flow will probably look just fine. And then you’ll get a $2,000 roof repair bill. Or the renter will stop paying and you’ll have six months of unpaid rent while you go through the long, tedious eviction process.
You must include less visible, irregular costs in your cash flow calculations. Vacancy rate. Repairs and maintenance. CapEx. Property management fees (even if you’re managing it yourself!). Accounting, bookkeeping and administrative costs. Use a free rental property calculator to run the cash flow numbers for any property.
Rental properties’ cash flow is about averaging out irregular but inevitable costs. I didn’t get that when I was young.
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We touched on this above; it’s not enough to buy a good deal, you then have to manage it for maximum returns.
While property management is a massive field of study in itself, the two most important pieces for maximizing returns are tenant screening and renter retention. In other words, getting good tenants, then keeping them for as long as possible.
The “four horsemen” that kill rental returns are rent defaults, evictions, turnovers and property damage. They can all be avoided through comprehensive tenant screening and disciplined renter retention programs.
Read up on Tenant Screening 101, and if there’s nothing else you ever learn about property management, get tenant screening and retention right.
And if you don’t have the time or temperament to manage properties yourself, don’t sweat it. You can hire a property manager. Just beware that you still have to manage the property manager, and ensure they’re doing best practices like semi-annual inspections of every rental unit, annual rent raises, and so forth.
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If you don’t own any rental properties yet, consider house hacking for your first deal.
For non-real estate investing nerds, house hacking refers to buying a small multifamily property (2-4 units), moving into one unit, and having the neighboring renters pay the mortgage.
Why is this such a great strategy?
First, you can get a residential mortgage as a homeowner, for a property with up to four units. Lenders will even let you add 75% of the future rents to your income, to help you qualify for the loan. You get a low down payment, a low interest rate, and lower lending fees, as a homeowner rather than an investor.
Beyond the financing advantages, it gives you an up-close-and-personal introduction to managing rentals… and renters. You’ll get a great education from managing your first few rental units so intimately.
Multifamily properties tend to cashflow better than single-family homes, which is another perk. Read Tim’s story about how he, with no real estate investing experience, house hacked a duplex and now lives for free.
But you don’t even necessarily have to buy a multifamily in order to house hack. You can buy a single-family home, and create an income suite. Or you can just rent out the other bedrooms!
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As the saying goes, perfection is the enemy of progress.
There’s no such thing as a “perfect deal” in real estate investing. There are good deals and bad deals. A good deal will have delivered a strong return by the end of each year, even after those uncommon-but-inevitable expenses such as vacancies and repairs.
Which still might require a great deal of work to find. Good deals are out there, but that doesn’t mean they’re littering the MLS and you’ll stumble over a new one every day.
Set a target for cash-on-cash returns, based on those cash flow calculations we talked about earlier. I recommend aiming for 8-10% to start with, but that’s your decision. Commit to yourself that you will not settle for a deal that earns less than your target, and set out to find a deal that works.
Don’t be afraid to negotiate. Don’t get discouraged. Keep pressing forward until you find a good deal, and forget idealized notions you might have about finding the exact perfect property.
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In support groups I hear new rental investors asking all the time about the “fancy stuff.” Questions like “I’m preparing to buy my first rental property, should I use an LLC or S-Corp, or a trust?”
There’s also a lot of talk about timing the market, or trying to find the perfect financing that gives you that extra 1% of LTV.
Forget that stuff. Or rather, put it aside for years from now. When you’re first starting out, you don’t need to worry about advanced strategies like asset protection. It’s a distraction from what’s most important.
Focus on the fundamentals: calculating cash flow. Screening tenants effectively. Attracting good applicants. Strategies for finding good deals on properties.
You don’t need an LLC for your first property. And timing the market? The best economists in the country often get it wrong when they try to predict the market. If they can’t do it, you can’t either.
What you can do is accurately forecast cash flow, so even if you buy a property and its value then drops, you’ll still earn profits from it as a rental. That’s the beauty of rentals: they keep on making money, so you can wait until whenever you’re ready to sell.
It’s among the best financial advice you can learn young: master the fundamentals of personal finance and investing, and you can’t help but start building wealth faster.
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As a landlord, even just as a responsible adult, you do need a cash cushion.
Sometimes you’ll be hit with unexpected expenses. It could be the furnace this year, and then next year the air conditioning condenser. Or your tenants could lose their job and stop paying the rent. Or you could lose your job, right at the same moment that the furnace needs replacing.
So yes, you’ll need some cash set aside. But it doesn’t need to be tens of thousands of dollars. If you can cover your own bare-bones living expenses for a couple months, and you have an extra thousand or two set aside for unexpected repairs, you’ll probably be fine.
If you really need it, you can always put some expenses on your credit card – yet another reason to keep a low (or no) balance on your credit card, so that it’s an option for emergencies.
At a certain point, there is such a thing as too much cash. Cash loses money every year to inflation, so you want to keep enough to help you sleep at night, but not so much that you’re losing out on other potential investments.
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There’s a difference between working-class neighborhoods and slums. If you intend to invest in cheap real estate, you need to know exactly where that line falls.
When I was in my 20s, I had this grand vision in my head, that I would turn these bad neighborhoods around. What happened instead is these bad neighborhoods turned my wallet upside-down.
If you’re just starting out, I recommend investing at the intersection of working-class and middle-class neighborhoods. The kind of neighborhoods where people take pride in their homes and yards, even if they’re smaller. Neighborhoods where curmudgeonly old men are constantly keeping an eye out, where mothers shake brooms at ne’er-do-wells, where the community polices itself.
Take it from someone who has lost a lot of money to bad neighborhoods: leave them to niche specialists.
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No, you don’t need to be a smooth-talking glad-hander. But you do need to constantly look for ways to meet local people who can collaborate with you in some way or another.
You need a great real estate agent, preferably one who specializes in investors.
You need a wide range of contractors, from every specialty (including low-cost handymen).
The list goes on: lenders, home inspectors, wholesalers, turnkey sellers, property managers. Real estate investing is a team sport.
And as for finding deals, remember something: it’s your network that will produce good deals for you, not your own brilliance. You’re not going to develop a magic formula, a secret algorithm that will make you the best real estate investor alive. But you can build a network that constantly helps you succeed.
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Too many novice real estate investors think rental properties will magically slash their tax bill. For that matter, so do too many homeowners!
Investment properties do come with some tax advantages. You can take advantage of dozens of rental property tax deductions
Rental Property Deduction Checklist: 21 Tax Deductions for Landlords in 2022
, all “above the line,” so you can still take the standard deduction rather than itemizing. You can even deduct the cost of the building itself and all capital improvements, with rental property depreciation. Plus, you have plenty of ways to avoid capital gains taxes on real estate.
But don’t buy a property with negative cash flow and justify it with the tax benefits. To begin with, you can’t even use rental property losses to offset your active income from your job or elsewhere — it can only offset other passive income. And even if you could, negative cash flow means you have a liability, not an asset.
Buy rental properties for cash flow and passive income. Hopefully they’ll also appreciate, but as you should know by now, real estate doesn’t always go up in value. Don’t buy counting on future appreciation, and don’t buy primarily for the tax benefits.
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Few real estate investors have $50,000 just sitting around when they first start investing. And beginners certainly don’t have the experience and skills needed to reliably earn strong returns (or even positive returns).
Don’t reinvent the wheel. Just partner with an investor with more experience and money than you have.
Swallow your pride, and learn how to avoid common real estate investing and property management mistakes. You’ll save yourself a world of pain.
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Novice real estate investors often fail to look beyond their home city. But large, coastal cities tend to make terrible markets for real estate investing.
To begin with, the cap rates and gross rent multipliers (GRMs) are terrible for rental properties. In other words, the ratio of rents to prices is too low.
Along similar lines, there’s just too much competition. You have too many investors tripping over each other to invest in limited housing supply.
Worst of all, the laws in major cities tend to tilt heavily in favor of tenants. These markets end up with distorted anti-landlord laws that come with too many hassles, fees, red tape, and risks for investors.
Find investor-friendly markets, with better fundamentals and regulation both. Start with this breakdown of the top cities in the US for rental properties by GRM.
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People talk about fear and greed being the two opposing forces that guide all investments and market movement. Neither is the right state of mind for success in real estate though.
I gave up several good years of real estate investing because I was afraid. Later, I bought deals I shouldn’t have because I was greedy and cocky.
Approach real estate investing as a calculated risk, because that’s exactly what it is. It’s an investment of work up front, to earn ongoing profits and passive income indefinitely. But it still takes work up front.
Real estate investing is not a get-rich-quick scheme. It’s a get-rich-slowly-after-work-and-diligence plan.
There are no free lunches in life, but there are predictable ways to gradually build wealth. I wish I’d known the above when I was younger, because it would have saved me a lot stress, grief and money along the way.
What lessons have changed your life as a real estate investor? Or if you haven’t yet bought any properties, what do you see as your biggest challenges?
This article originally appeared on Sparkrental.com and was syndicated by MediaFeed.org.
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“Living in your investment property can cut down costs significantly. The money saved on rent and costs associated with renting a property can boost your renovation budget. Being on-site cuts travel costs to and from the property. It also means you will be readily available to answer contractor questions avoiding delays based on communication.
“Having more time in the property, you can tackle easy DIY tasks yourself. Every small task you complete yourself reduces expenses and increases the return on your investment. Certainly, for the first investment, you will find yourself counting every dime. After several investments, finances become easier and you have the confidence to take on more challenging projects that have a higher return on investment.
“My partner Andy and I bought our first house just after college, and it was so successful that we ended up starting our own real estate investment business! We love flipping houses and living our best lives together.”
As an added bonus, you can take out an owner-occupied mortgage, such as through Credible. That keeps both your interest rate and down payment lower than they would be with a hard money loan.
House Hacking
Deni and I are huge proponents of house hacking and have each used several house-hacking tactics over the years. The classic house hacking technique involved buying a small multifamily property, moving into one unit, and renting out the others. You can use conforming mortgage loans for properties with up to four units, and again take advantage of lower down payments, lower interest rates, and lower minimum credit score requirements. Check out this duplex house hacking case study for details on exactly how it works.
But multifamily house hacking isn’t the only way to skin that cat. I’ve rented out rooms to housemates, covering the bulk of my mortgage payment. Deni has rented out storage space in her garage and even went so far as to host a foreign exchange student for four years. The stipend covered most of her monthly payment.
You can also rent out an accessory dwelling unit (ADU) to cover some or all of your mortgage. And if you don’t like the idea of sharing part of your property with long-term neighbors, no one says you have to sign a long-term lease agreement. You might prefer renting to short-term guests on Airbnb, and possibly earn higher returns to boot.
Real Estate Wholesaling
Also known as flipping contracts, wholesaling real estate involves putting a property under contract at a bargain price, then selling that contract to another investor — with a margin built in for you.
“For example, suppose you locate a $85,000 home and put it under contract for $55,000,” explains Corey Tyner, founder of Buy Yo Dirt. “You then sell the rights to that contract for $65,000 to another real estate investor. At the closing table, the seller receives $55,000, you receive a $10,000 finder’s fee, and the real estate investor gets a fantastic deal on a home.
“If everything goes right, you will never have to take title to any properties. You do, however, make a healthy profit.
“It won’t cost you much money; all you’ll need is a bit of earnest money deposit to pay the seller, which might be as low as a few hundred dollars. Many first-time real estate investors begin by wholesaling to learn how to invest in real estate with little money. After a few wholesale deals, they have enough wealth to start retaining properties for themselves.”
Real estate wholesaling requires you to master two skills: scoring great real estate deals and building a network of real estate investors to sell to.
Borrow the Down Payment: Business Credit
Who says you have to come up with a down payment out of your own savings?
One way to invest in real estate with no money is to borrow the down payment from a business credit line or credit card. Because they’re not secured by collateral, they tend to come with relatively low credit limits and high-interest rates. But you can combine many different credit lines and business credit cards to come up with the down payment, and then quickly pay it off with the flip profits or cash flow from the rental property.
In fact, many business credit cards come with an introductory 0% APR period ranging from 12-24 months. As long as you pay off the balance before then, it’s an interest-free loan.
Check out this video on how to open unsecured business credit lines as a real estate investor, using credit concierge service Fund&Grow. And while you’re at it, read up on other creative ways to come up with a down payment for a rental property.
Borrow the Down Payment: Seller Financing
Business credit lines aren’t the only place you can borrow money for a down payment. Sometimes sellers offer owner financing as well.
That could mean just borrowing the down payment, as a second mortgage on top of an investment property loan from a portfolio lender like Kiavi or Visio. Or it could mean borrowing one loan from the seller to cover most or all of the purchase price.
My grandfather used to say “You don’t get what you deserve in life; you get what you negotiate.” You never know what sellers will agree to until you ask.
Just keep in mind you’ll probably have to explain how it works to them, as most aren’t familiar with seller financing. But once they understand and agree to the premise, you can negotiate the specifics of interest rate, balloon term, and any up-front fees on the private money loan.
You don’t necessarily have to put a down payment on a house, but you do need to get creative if you want to invest in real estate with little money.
Mobile Homes
Real estate author and trainer Roseann Galvan puts it succinctly: “Although not the sexiest option, mobile home rentals are the easiest and least expensive way to start directly investing in real estate.
“While mobile homes may not appreciate as fast as traditional homes, they are usually the least expensive path to ownership. Mobile homes are also smaller and easier to rehabilitate and clean so a mobile home in need of some TLC is the perfect place to start.
“The increased interest in camping and glamping has made shabby chic a sought-after commodity — a great opportunity for the mobile home investor in both rural and urban vacation-friendly locations.
“Another option for the new investor is to purchase mobile homes on land that has the potential to be developed one day. You can make money on the mobile home rents while the land appreciates. After you have amassed some capital, you can either choose to add additional rental units in the form of accessory dwelling units or build a conventional single-family or multifamily residence that you will in turn rent out, generating further rental income for the long term.”
Short-Term Rental Arbitrage
Sure, you can go out and buy a property and then rent it through Airbnb. But that requires coming up with a down payment, paying for repairs and maintenance, and all the other expenses that come with rental properties.
Instead, consider vacation rental arbitrage. It works like this: you negotiate a bargain long-term lease agreement with a landlord, as the renter. You get written permission in the lease agreement to sublet, including on a short-term basis. You then furnish the unit and rent it on Airbnb and VRBO, earning a profit each month on the stronger cash flow it earns as a vacation rental.
Alternatively, you can advertise the property as a corporate rental for periods ranging from one to six months. Often businesspeople and travel nurses need this sort of “extended stay” lease term, and pay a premium for furnished units.
This doesn’t work with every property, of course. You need to find units with strong year-round demand among vacation guests or business travelers, and then you need to negotiate a cheap lease with the property owner. Check out this free video explaining exactly how rental arbitrage works.
Land Flipping
Deni and I started investing in raw land a few years ago, and while it comes with its own quirks and risks, you can earn enormous returns with far fewer headaches than residential rental properties.
The business model is simple enough: buy land parcels for a fraction of their value, then resell them at full market value. Seth Williams, real estate broker at Reference Real Estate, puts it like this: “Land speculation is a straightforward and short-term investment in real estate. However, be aware of all the potential benefits your lands hold in a particular real estate market. Otherwise, it can be a risky investment, and you may be unable to sell for a profit.”
In other words, before buying a piece of land, you need to know why other buyers might want to buy it, and who those buyers are. That helps you market it effectively to the right people, so you don’t get stuck holding a piece of undeveloped land — and paying property taxes and potentially HOA fees on it indefinitely.
You can also offer hold owner financing notes when you sell properties, earning passive income from interest. Raw land isn’t regulated like residential real estate, so you don’t have to go through the lengthy foreclosure or eviction process to reclaim possession of it.
Plus, you can buy land plots for as little as $100. That ranks it among the smallest initial investments of any real estate investment strategy on this list. Closing costs are also much lower, since you don’t necessarily have to go through a title company.
Real Estate Crowdfunding
I’ve had nothing but positive experiences with real estate crowdfunding investments.
They come in two broad categories: equity and debt. Equity crowdfunding means buying fractional ownership in properties, while debt crowdfunding involves funding loans secured by real property. The former offers better long-term appreciation, the latter generates better income yields in the short term.
A few of my favorite real estate equity crowdfunding investments include Fundrise and Streitwise. Fundrise owns large pools of properties, including apartment complexes, mixed-use buildings, single-family rental properties, and also some secured property loans as well. Streitwise owns several large commercial office buildings, and pays a reliable 8.4% dividend.
You can also buy fractional shares in single-family rental properties through Arrived Homes, with as little as $100 per property. Note that all of these equity crowdfunding platforms require a long-term commitment, typically five years.
Among real estate debt crowdfunding investments, I particularly like Groundfloor and Concreit. They work differently — Groundfloor lets you pick and choose individual loans to fund, while Concreit just has one pooled fund that owns many loans secured by real estate. You can earn 8-15% returns on Groundfloor loans, and they generally repay within 3-12 months. Concreit pays a fixed 5.5% dividend, but here’s the kicker: you can withdraw your money at any time, with no penalty against your principal.
If you’ve ever wondered where hard money lenders get the capital for lending out, well, many raise it from people like you through crowdfunding!
You can compare other real estate crowdfunding investments on our comparison chart and overview.
REITs
While real estate crowdfunding investments are privately owned, and you buy and sell directly with the company offering them, real estate investment trusts (REITs) trade on public stock exchanges.
“Rather than buying real assets, investors purchase stock in a firm that develops or manages them, explains Matt Lee, founder of Innovative Building Solutions. “In this regard, REIT investing is comparable to stock investing; however, REITs offer a wonderful way to earn passive streams of income from real estate investing without buying property yourself.”
On the plus side, REITs tend to pay high dividend yields, and of course come with instant liquidity, as you can buy and sell shares instantly through your regular brokerage account. But those advantages also come with corresponding downsides.
Because REITs must pay out at least 90% of annual profits to investors in the form of dividends, it’s difficult for them to expand their real estate portfolios to boost their share price. And because they trade on public stock exchanges they share an uncomfortably close correlation with stocks.
Different REITs own different types of physical properties. Some own apartment buildings, others own office buildings or industrial parks, or fund real estate developers building new real estate projects. Other REITs own debt secured by real estate property, funding private loans or more traditional lenders. You can buy mutual funds and exchange-traded funds (ETFs) that own a wide range of REITs as well, for broader exposure.
Since you can buy shares in REITs for under $10, they offer one of the lowest minimum investments on this list.
Private Notes
Real estate crowdfunding platforms aren’t the only way to invest in debt secured by real estate.
“A promissory note is the legal document that a borrower signs to formalize and legally bind the loan,” explains Corey Tyner. “As a result, private notes are private loans between two parties.
“Instead of paying excessive interest and fees to banks, as real estate investors acquire expertise, they frequently turn to friends and family members to obtain money to buy new properties. In an ideal environment, everyone wins: the real estate investor gets to negotiate their loan terms, and the private noteholders get a consistent, high return on their investment.
“Of course, things don’t always go as planned. Novice investors lose money from time to time, making for unpleasant conversations with friends and family.
“Before you throw money at every real estate investor you know, look at their past projects. Check whether they have a proven track record of making a profit because foreclosing is a costly and time-consuming procedure, even if you acquire a claim on their home. Doing your homework ahead of time will help you avoid this.”
Final Thoughts
As you research how to invest in real estate with no money, choose one strategy and dive deep into learning it. Master one real estate investing strategy before you try to expand into others.
It usually takes a few deals in one real estate investing niche before you consistently start earning money in it. I lost six figures when I first started investing because I thought I could figure it all out on my own. In retrospect, I wish I’d had the humility to take on a mentor or senior real estate partner.
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This article originally appeared on Sparkrental.com and was syndicated by MediaFeed.org.
Bear market investing strategies
A bear market is generally defined as a drop of 20% or more from market highs. The term can be used to describe a specific security or the market in general. When a certain stock drops 20% in a short time, for example, it can be said that the stock has entered a bear market.
A bear market during a general market downturn means that multiple broad market indexes such as the Standard & Poors 500 Index (S&P 500) or Dow Jones Industrial Average (DJIA) fall by 20% or more in two months or less.
Bear stock markets are usually associated with economic recessions, although this isn’t always the case. As economic activity dries up, people lose jobs, consumer spending falls and business earnings decline across the board. As a result, many companies see their share prices tumble.
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Rather than avoiding a bear market altogether, there are some investing strategies investors may want to consider.
The term “hedging” is investment lingo for insurance. A hedge against something is an action taken that provides a kind of insurance policy against a specific outcome.
Owning gold is often referred to as an inflation hedge, for example, because it’s thought that the price of gold performs well during times of high inflation. Investors sometimes buy gold as insurance against inflation.
Likewise, while most investors remain hopeful that their investments will rise in price, the reality is that sometimes financial assets decline in value.
To protect against the potential of that happening, investors can employ bear market trading strategies. To hedge against the effects of a bear market, investors generally employ a bear market strategy falling under one of three broad categories:
- Buying investments that should go up during a market downturn.
- Using various strategies to short the market, like put options or inverse Exchange Traded Funds (ETFs).
- Holding on tight and waiting things out.
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The first of these bear market investing strategies involves buying assets that will increase in price when the market takes a dive. There are many factors that influence which investments perform well during a bear stock market.
In general, investors tend to be risk-averse during downturns and seek safe-haven assets rather than risky ones. That means things like gold and silver, stocks relating to the mining and production of gold, dividend-yielding stocks or large and mature companies and stocks of companies that work in sectors that have constant demand, like utilities and food. Buying assets like these at the beginning of a downturn, or just before, can be beneficial.
There also tend to be parts of the market that do well according to the particular circumstances surrounding a market downturn or economic recession.
During the 1970s, for example, there was a shortage of oil. While this led to high prices for gasoline, it also wound up being bullish for oil and related investments like the stocks of large petroleum companies.
More recently, many economists believe that the United States is currently in a recession. The recession of 2020 has, so far, seen at least three types of stocks outperform others. These include companies in:
- Cybersecurity and work-from-home tech.
- Pharmaceuticals working on disease cures.
- Gold and silver mining.
Thinking about the context in which the current recession is happening, it’s not too hard to see why these investments have done well.
More people are working from home than ever before, so companies that deal with cybersecurity, video conferencing, or workspace communication have generally outperformed.
Because a pharmaceutical cure for the COVID-19 virus might bring economies out of shutdown, companies that have put out press releases showing progress toward a cure or vaccine have seen their share prices increase rapidly.
And last but not least, gold and silver have increased in value because people have become worried about the future. With a lot of uncertainty in the air, many people have sought the safety of gold.
So much so, in fact, that there were times when physical silver and gold were temporarily unavailable at any price from most dealers. The rising price of the precious metals has, in turn, led to increased profits for mining companies that are the world’s only source of new supply.
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One of the more sophisticated bear market trading strategies involves placing bets that will rise in value when other investments lose value.
This might involve, for example, placing long-term put options contracts on some of the securities in a portfolio. Alternatively, investors can purchase shares of an inverse ETF as the overall market starts declining.
The topic of using put options and other various short strategies has many nuances that go beyond the scope of this article. Interested investors ought to conduct additional research before considering this strategy.
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During a bear stock market, it’s not always necessary to do anything special.
Investors who have a long-term time horizon in mind sometimes choose to simply hold on and stay the course. The reason behind this is simple.
Bear markets happen in ways that tend to be abrupt, volatile and short-lived. The 2007 to 2009 bear market began in December 2007, and was over by March 2009, lasting only about a year and a half, for example.
But the bull market that followed lasted almost eleven years – the bottom for stocks was seen in March 2009, whereas the next big crash didn’t happen until February 2020.
Taking a long-term perspective can pay off well over the course of many years, as the market as a whole trends upwards over time. Investments in an S&P 500 index fund during the summer of 2008, for example, saw steep losses over the following year. But that fund, ten years later, in 2019, has still appreciated by a wide margin.
There’s one caveat for long-term holding, though, and that’s a well-diversified portfolio. Being diversified typically ensures that all of an investor’s eggs are not in one basket, thereby spreading risk around and reducing it overall. One easy way to accomplish this might be to buy structured securities like ETFs or index funds.
One way to hold assets for the long-term and not be too concerned about short-term market fluctuations is to make regular investments regardless of what’s happening.
Some employers offer 401(k) retirement plans and will match an employee’s contribution up to a certain point. This type of long-term investing on a regular basis has the potential to be financially advantageous.
It’s also possible to set up automatic contributions to different investment accounts including brokerage accounts, individual retirement accounts (IRAs), or robo-advisor accounts. Robo-advisors make investment decisions for you based on your personal needs and goals.
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For those investing for the long term, the only real difference between a bear market and a bull market will be a temporary dip in the value of their portfolio. The main goal will be to stay the course. As mentioned, long-term investors often make regular, recurring purchases of financial assets.
Some investors choose to increase the amount of money they put into their investments during market downturns. Their overall strategy remains the same, but buying more assets at cheaper prices lets them acquire a larger number of assets overall.
For those with a higher risk tolerance looking to make short-term gains (often referred to as speculators), a mix of strategies might be employed. Speculators may look to short the market using puts or inverse ETFs, or research assets likely to increase in value due to current bear market trends.
During bear markets, there may be short-lived, rapid rises in asset prices, which are often referred to as “bear market rallies,” “bull traps,” or “sucker’s rallies.” Some investors choose to sell during these rallies, and either save the cash or use it to speculate elsewhere.
During bull markets, a common investment strategy is simply to buy and hold. This tends to work because bull markets are characterized by most asset classes rising in unison.
Markets don’t go up or down in a straight line. Conventional wisdom states that during bull markets, it’s wise to “buy the dips,” meaning investors buy whenever prices decline significantly. During bear markets, some investors “sell the rips,” meaning investors sell during the large rallies that tend to occur.
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Bear market investing strategies don’t have to involve anything fancy. Sometimes it just means making additional investments or finding new ones. A simple to use online investing account is one tool that offers multiple strategies.
Choosing the right bear market strategy is a personal choice, but that doesn’t mean an investor has to have all the answers.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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