During a decline in the economy, investors are quick to seek out safety in their investment holdings. Instead of sticking with an asset allocation representing a diversified portfolio, logical trading strategies often get replaced with emotionally charged sell-offs of otherwise high-performing investments. Despite sound investment principles, investors shift their losing equity positions to more stable, less volatile investments, including cash and money markets, short-term debt securities, defensive stocks, and/or precious metals. These investment options hold the least amount of market-related risk when the overall economy is in a tailspin.

Key Takeaways

  • Savings and money market accounts provide investors a medium to earn interest without the risk of market fluctuations.
  • Shorter-term government bonds have an inverse correlation to the stock market, and as such, tend to rise in price as stock prices fall.
  • Established companies with solid balance sheets, known as defensive companies, have a much easier time withstanding bear market conditions.
  • Precious metals typically shine during prolonged bear markets because they hold their value and offer a hedge against inflation due to their finite supply.

Cash and Money Markets

For the average investor, a decline in the markets that lasts more than a few months is enough of a catalyst to move out of an equities-heavy portfolio. The most common place to set aside funds from that sell-off is a cash or money market account. A cash account, most commonly in the form of a bank or credit union savings account, is not tied to the stock market and presents little risk to investors. A money market account, either offered through a bank as a deposit account or through a brokerage platform as a mutual fund, is also a common holding place for funds recently removed from the stock market. Both savings and money market accounts provide investors a medium to earn interest without the risk of market fluctuations. Money held in cash or money market accounts can easily be invested back in the markets once the investor feels comfortable enough with performance. As of June 2020, several of the highest interest yielding savings accounts include Fitness Bank at 1.50%, First Foundation Bank at 1.45%, and DollarSavingsDirect at 1.40%.

Short-term Debt

Another safe move by investors in a bear market is to place recently traded equity securities into short-term debt securities, such as U.S. Treasuries. These shorter-term government bonds have an inverse correlation to the stock market, and as such, tend to rise in price as stock prices fall. During a bear market, trading strategies shift toward safety, creating a much higher volume of U.S. Treasuries owned by investors. This also gives rise to price increases that, in turn, provide investors with more stable portfolios. Not all bonds are created equal during a bear market; investors should seek out shorter-duration debt and steer clear of high-yield corporate bonds when the economy is in decline. Examples include the 4-, 8-, 13-, and 26-week U.S. Treasury Bills.

Defensive Stocks

In addition to cash and short-term debt, some investors can find stability in defensive stocks. Smaller, younger companies are not always able to handle the financial constraints that a bear market can impose on businesses and are therefore not the best investments to hold during an economic decline. However, larger, more established companies with solid balance sheets, known as defensive companies, have a much easier time withstanding bear market conditions, with many continuing to pay dividends even when the economy is stagnant. Investors can create a hedge with defensive stocks during a bear market if they do not want to exit the markets entirely. Examples include The Procter & Gamble Company (PG), Campbell Soup Company (CPB) and The Coca-Cola Company (KO).

Warren Buffett became one of the greatest investors of all-time in part by focusing on defensive stocks. 

Precious Metals

Precious metals typically shine during prolonged bear markets because they hold their value and offer a hedge against inflation due to their finite supply. Unlike currencies, which can drop in value from government intervention – such as printing more money - the quantity of precious metals, such as gold and silver, is limited. Investors can gain exposure to this asset class directly through taking ownership of the physical commodity or purchasing an exchange-traded fund (ETF) that invests directly in gold and/or silver bullion or holds a portfolio of precious metal mining companies. Examples include the SPDR Gold Shares ETF (GLD), the iShares Silver Trust ETF (SLV) and the VanEck Vectors Gold Miners ETF (GDX).