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How Millionaires Invest During a Bear Market

Ellen Chang

Investing like a millionaire or an elite investor during a bear market can often yield better returns -- it often involves avoiding emotional-driven decisions.

The benchmark that Wall Street uses to determine a bear market is when the stock market takes a 20 percent dip. But following the strategies of millionaires or successful hedge funds is often the key to a successful investing strategy before it reaches that level.

Millionaire investor Gary Keller, for instance, earned his net worth by investing in real estate and co-founding a residential real estate brokerage, Keller Williams Realty.

Those with less capital might follow the sage investing moves of billionaire Warren Buffett, the CEO of the behemoth holding company and financial conglomerate Berkshire Hathaway (ticker: BRK.B, BRK.A).

Buffett has compounded capital at more than 20 percent annually for the last 50 years because he has avoided making decisions based on his emotions. The Berkshire CEO is well-known for having adopted a longer time horizon for his assets not focusing on quarter-to-quarter results.

[See: 7 Historic Bear Markets.]

For years, Buffett has recommended that people invest their money consistently into the S&P 500 because of the index's broader base and low fees.

"Investors across the spectrum of experience and net worth could learn from Warren Buffet's investing style," says Mike Loewengart, chief investment officer at E-Trade Financial, a New York-based brokerage company. "He is a true value investor, always hunting for a bargain."

Here are a few methods to grow your wealth:

-- Set up an automatic investing plan.

-- Limit your losses.

Set Up an Automatic Investing Plan

Investors should utilize an automatic investing plan to allocate money on a regular basis by purchasing exchange-traded funds or mutual funds and avoid timing the market.

"Not only does this create a good habit of investing for the long term, but these funds give them access to an array of holdings," he says. "Those who have accumulated wealth over time know the importance of investing consistently -- every little bit counts. Timing the market is a fool's errand."

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

"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," he says.

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

[10 Ways to Maximize Your Retirement Investments.]

Never average down a loser, says C.J. Brott, founder of Capital Ideas, a Dallas-based wealth advisory firm.

Buying more of a stock that has fallen in price from the original purchase price because the investor is hoping to get the average price down enough to get even on the next rally is a losing strategy.

This strategy is most widely attributed to Jesse Lauriston Livermore, Brott says. Livermore was probably the most famous stock market bear of his day in the '20s and '30s, known for his book "Reminiscences of a Stock Operator," which shows insight into the psychology of trading.

Investors should understand what they bought and why they bought it. Both are central principles of Gerald Loeb, the founding partner of E.F. Hutton & Co., a renowned Wall Street brokerage firm.

"He was probably the first true speculator in growth stocks because he always analyzed the financials of any company he bought," Brott says. "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 onto 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."

An example of following that strategy is having held Netflix ( NFLX) all through the Great Recession because the subscriber base continued to grow, he says.

Limit Your Losses

Rebalancing your portfolio is critical, says Peter Roselle, a Treasure Coast, Florida-based equity and options trader. Roselle is a fan of financial advisors that focus on short selling base on a large amount of research; a couple of examples include David Einhorn, president of New York-based fund management company Greenlight Capital and Jim Chanos, president of Kynikos Associates.

[See: 8 Best Gifts to Give for an Investment Education.]

"You should have been looking at your asset allocation as equity prices rose and adjusting -- the same is true as they fall," he 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."

Keep your losses small: This is a proven rule of winning speculators, Brott says. Richard Dennis, the modern day wizard of commodities 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," he says.

Another rule for the turtles was position sizing. No matter the size of the portfolio, never buy such a large percentage of any stock that a total loss would wipe you out, Brott says.

"Lack of proper sizing or what we called overtrading in the old days is at the root of most investment failures," he says. "To trade in a bear market, you must know your own strengths and weaknesses and compensate for the weakness by rigidly following the time tested rules of successful speculation."

Maintaining perspective is also key and how rich people keep their money, Roselle says. Bear markets don't last forever, but usually last longer than a month.

"If you're holding trash, this may be your time to find the exit," he says. "If you're adding to positions, remember the path of least resistance is still down and you shouldn't be maxing out position size yet."

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