Bull markets are excellent, but they don’t stay permanently. Dread it; run from it; the bear market still arrives. It can lead to huge losses in a snap of a finger. You should be ready. Here are some of the most effective ways to survive a bear market.
Get 100 percent Cash
This one can be very drastic, but it makes your worries disappear. You can stop searching for techniques and drink some beer while watching Netflix. The markets can fall all they want, and you have your money with you.
This move is usually the first choice for investors bummed with panic and fear. The downside to this is that you wouldn’t be sure when to get back in the game. When you see the market suddenly rally, you may be tempted to get back. Remember that bear markets typically have fake rallies, ones that make people think the catastrophe’s over.
The fix to this problem is to look at the fundamentals. If you decide to cash in 100 percent, look at the fundamentals. When you want to get back in, look at the fundamentals. These things can indicate real and organics rallies.
Get Partially Cashed
If you think going a hundred percent cashed is too big a move for you, you can go partial. What you have to do is sell the most overvalued securities you have. However, this may require a lot of analysis, plus a very sound strategy.
The money you have can serve as your fund when you want to finally buy cheaper stocks. Thus, you can protect your portfolio this way.
The downside is that bear markets can sometimes last for long—maybe even years. Investors may giddy up too soon and jump right in at the wrong moment. When they do that, they expose themselves to the whole bear market.
There are securities that can give your portfolio some hedge. Such are designed to move to the opposite direction of the indexes they track. Among these are futures, options, shorting, and inversely correlated ETFs. You may benefit from these depending on several factors, like your level of skill, risk tolerance, and knowledge.
If you can do this properly, you can offset a huge part or all of your portfolio losses.
The downside becomes obvious when the market rallies during a bear market. Since these securities move in the opposite direction, you losses can be huge if the market turns around a little. Going short, meanwhile, may bring about unlimited losses, at least theoretically.
See also: Strategies Used in Hedge Funds
Use a Tactical Strategy
When you use a Tactical Strategy, you can expose yourself to various securities or sectors. That is, if the security or sector fits the Tactical Strategies’ parameters. A Tactical Strategy can enable your portfolio to be fully invested. Depending on market conditions, it can also let you go fully cashed.
Again, you can go all in, partially in/out, or all out of the market. You can gain something out of the bear market rallies. You can also jump off ship when the tide goes back down.
However, there is no tactical strategy that can guarantee zero losses. Your strategy, then, should be able to go all cash. It shouldn’t be shifting among asset classes staying fully invested.
Use Stop Loss Orders
Stop loss orders can serve as your insurance against losses. You place stop loss orders under the current price. If the stock’s value hits or falls below that level, the platform will automatically sell the stock.
In addition, you can keep your portfolio as long as the value doesn’t reach the order level. You can also raise the stop loss level if the stock’s price goes higher.
But these are not perfect stoppers. They don’t guarantee you that the stock will be sold at the determined level. If the stock hits the level, it will be a market order. If it drops lower the stop loss price, you will get the smaller price.
The securities that have fallen down the first do sometimes recover first. If you have enough discipline, you can get into the securities that everyone else is selling. And you can get them at a lower or good price.
The biggest challenge you will have to face here is to see everyone else doing the opposite. You will see what you buy fall lower, but you have to focus on the long term.
This is not suitable for all investors. Trading actively doesn’t only mean day trading. This may also refer to closely monitoring a security and trading from a point to another. You shouldn’t think too much if it goes further up. It’s also very important that you can take the damages if the trade goes against you.
If you do this well, you can increase the return percentages to your portfolio’s performance.
It goes without saying that you can lose money easily in this strategy. Your trades may become long-term holdings if they fall and you can’t bear it. Moreover, you may feel a little greedy and trade a little too often. If you do that, your losses can stack up on top of each other very quickly.
Under favorable circumstances, this can mean that you don’t really have to do anything. Do not buy nor sell. The market will eventually recover, and you’ll find yourself still fully invested.
However, there’s huge risk in this strategy, primarily concerning time. This is because the market usually takes a long time to recover. It can take years and years to see the market beat its previous peak prior to a bear market.
Check Your Fears
Sometimes, the bear market doesn’t come full blown. This means that despite the bear market, investments can recover far quicker than anyone can expect.
The stock market always comes back to the bull market in spite of huge market crashes and corrections. Therefore, you have to keep yourself in check. Learn to separate emotions, especially fear, from logical thinking. You shouldn’t decide solely on emotions.
Try Averaging Down
As we have mentioned, the bear market can last for years. It may feel like you’re in an infinity war. If you still plan to stay in the game for the long haul, you can use dollar-cost averaging.
If you buy shares regardless of the price, you can buy shares at a low price when the market declines. Eventually, the costs you pay will “average down” and will give you better overall entry prices for your shares.
Make Sure You Diversify Properly
This is a no-brainer. You have to always diversify. If your portfolio suffered from the bear market, it’s obviously high time to improve your asset allocation.
Have a percentage of your portfolio for bonds, stocks, cash, and other alternative assets. This is the golden rule of diversification, where you don’t put all your eggs in one basket.
How to allot your assets depends on your goals, risk tolerance, time horizon, and other investor-specific factors. Having an excellent asset allocation strategy can offset some of the negative impacts of the bear market.
Invest in What You Can Lose
Some investors go for broke, which is, most of the time, a grave mistake. It’s important to have the guts to risk some amounts of money for a reward. However, it’s equally important to know which to risk and which to not risk.
You cannot use any money you can’t afford to lose. Remember that you have to keep a roof on top of your head. Remember that you have to have an investment horizon of at least 5 years.
Keep an Eye on Value
You can view the bear market as an excellent time to buy valuable stocks. The bear market hammers companies’ valuations—including those good companies’. The trick is to know which you really want to buy.
You can imitate Warren Buffet, who builds up his position during down times. This is because the bear market can and will punish even the good companies severely.
Prop Up Your Defenses
When we say ‘defensive’ stocks, we generally refer to stocks that are non-cyclical. These stocks typically perform better than the overall market in times of bearishness. They incur fewer damages than cyclical stocks.
When you invest in these, you get consistent dividend and stable earnings—regardless of the overall market. Examples of these are companies producing non-durables. These fall under the defensive industries since people will still buy them even during hard times.
Conclusion to the Bear Market
Surviving the bear market is a huge challenge that many investors are afraid to face. This is why it’s important that you make the most out of a bullish market. Overall, you should keep a straight face and don’t let the bear overwhelm you. Fortify your portfolio and brace for impact. Consider your options. Plan and make sure you’re two steps ahead of the whole market. The best way to do that is to get to know yourself as an investor.
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