Learn more about Yearn.finance, a relatively unknown lending aggregator that became one of the most popular digital currencies and...
Knowing how to invest in a bear market is vital if you want to protect or increase your portfolio. Here’re the key strategies and tips for investing when markets are in red.
A bear market is a period where there is a sharp decline in market prices coupled with a negative market sentiment, which can further drive the prices down.
The start of a bear market is often signaled by a 20% decline in an asset’s price. This period is also indicated when if the prices of securities keep falling for at least two months (during this downtrend, prices may tank up to 80%).
In a bear market, it is difficult to ascertain when prices will stop declining. It may also be hard to tell if the bottom has been reached before a retrace into an uptrend.
Investors may lose good opportunities to buy the dip or bottom before prices finally kick in. Similarly, investors who dive into the market too quickly (when prices have not hit the bottom) could suffer even more losses.
There are, however, several measures that can be taken to curtail these losses. These measures will also aid an investor to earn even in the face of a bear market.
Here, we’ve outlined some of the basic strategies that will ensure that your portfolio does not devalue significantly during a bear market.
Here are some key principles that should guide your investment during a bear market. They include:
The right investment allocation in your portfolio will help you to remain calm during a bear market. It could be a mix of stocks, ETFs, bonds, etc. It is important to have a mix that achieves a particular goal and meets your risk tolerance. The reason is, you’ll be less bothered about the bear market.
In cases where you are disturbed about the losses you may have incurred, it may be a sign that you’re not investing based on the risk you can tolerant. The latter may be evident when you are more aggressive in your investment during a bull market but become conservative during a bear market. Needless to say, stick to your investment plan despite the prevailing market.
Another way to set up the right investment allocation is with the use of a single asset. For example, if your aim is to use the invested funds some years from now and you invest aggressively, it may be more ideal to opt for stocks. But before being entirely invested in stocks, know that huge gains in stocks can also result in immense losses.
A good way to invest at regular intervals and consistently is to opt for an employer-sponsored retirement plan. Here, you get to invest a fixed amount from your weekly or monthly income. This money is deducted from your salary and added to your investment account.
It, therefore, means that your investment will be made when prices are low or high. This strategy enables you to acquire more shares and at a cheaper price. And when prices pick up, you’ll be in for a profit due to the higher value of the previously acquired shares. The best part is, your cost will tend to average down and you’ll be having a better buying price for these shares.
In your decision-making process, it’s important to remain calm and be in control of your emotions. This is because emotions such as fear can lead to making the wrong investment decisions. Keep in mind that the market still has a way of surviving despite an economic downturn, and other unexpected situations.
There could be a global economic meltdown, however, you need to realize that this is a phase. And the economy will not always be in a particular state. That being the case, the market cycle will also tend to change from its bearish to a bullish state. Therefore, the current situation should not cloud your sense of judgment.
There are different stocks you’ll find in a bear market. There are those that are underpriced or have taken a clear beating. And that would pose a bit of difficulty choosing stocks from companies with great values and those that offer little to nothing. The reason lies in the fact that its a bear market and even the good stocks can perform badly.
Despite this poor performance in the market, the devaluation of good stocks provides a good buying opportunity. As such, instead of shying away from the market entirely, you can gradually build your position. And when there is a bull market, there would be immense rewards and an opportunity to sell for a profit.
It is entirely possible to protect your capital, savor your gains, and generally, reduce losses in a bear market. The latter is made possible by positioning yourself rightly to benefit from a market in a downtrend. You’ll be able to do so by implementing the following strategies.
There’s a strategy that can make you more money at the end of a bear market. This strategy involves buying stocks or an asset at regular intervals. An example is 2007’s bear market which lasted for two years. At the time, some index funds investors resorted to buying assets through a 401(k). These investors were uncertain of when the bear market would end and could only speculate.
Accordingly, they resorted to buying shares gradually and at a cheaper rate. Hence, they became profitable when prices began to surge. Therefore, it’s better to create an investment plan that would require that you invest in bits at regular intervals. The latter could potentially yield more profit than investing all your funds at once.
An asset or stock’s past performance in previous bear markets can tell you a lot. First off, it’ll help you decide if such an asset or market sector can withstand the general trend in the market. The latter can be ascertained by reviewing the stock or sector whether it surged or maintained its value during previous bear markets.
Assets like gold and silver, for instance, may perform better than other assets in the face of a downtrend. And the same can be said for defensive stocks such as food stocks. The latter applies to sectors such as health care, utilities, etc. which may still have a good performance despite the general downtrend.
On the other hand, it’ll be useful to fall back on financial data published on reliable websites. This data reveals sectors whose performance is better than others. The next step would be to channel funds into that sector since it may also perform well in the long run.
The short and long term puts helps to mitigate losses during a bear market. That is why if you’re speculating that a bear market is underway but you’ve already bought into the market, you need to implement this strategy. It involves the purchase of cheap puts on top indices.
What’s more, a put can be classified as an option that denotes rights for a hundred shares. The put has an allocated time before it loses its worth. It also has a specific selling price. By purchasing puts from Nasdaq, or the S&P 500, you’ll have puts that are gaining in the face of falling indexes.
It gets better given that the value of options surges and declines faster compared to stocks. And that being so, your put contracts irrespective of how small they are can help to reduce losses incurred in the stock you’d purchase. You can opt to sell these puts on the market or give them up. Despite this, it is worth noting that this strategy is a risky one.
Now that you know how to invest in a bear market, you’re in a better position to protect your portfolio to prevent a massive loss. You’ll be able to build your portfolio gradually by taking advantage of the downward price movements. Therefore, employ these strategies to make high returns when the bull market returns.