The time of bear market is dangerous. In this article, we will highlight, what is the best strategies for a bear market, for example, keep your fears under control, build up with dollar cost averaging, play dead, diversify and more.
A bear market refers to a huge decrease in asset prices of at least 20% from recent highs. There are eight important investment strategies that will be of good help when the stock market takes a swipe at ones returns.
- Some strategies that will be of good help when someone is caught with a bear market
- Pratical and protective measure can be taken, building up more shares in a strict disciplined way as price falls to pick up stocks on sale.
- One can go on the offensive and take a short position in the market, profiting as price falls
BEST STRATEGIES FOR A BEAR MARKET
KEEP YOUR FEARS UNDER CONTROL
Hear an old saying on wall street: ”The Dow climbs a wall of worry”. This means that, always The Dow has continued to progress despite economic problems, terrorism and countless other calamities. Investors should always keep your fear under control and carry on in times of bear market. It should be noted that fear is an emotion that can makes it difficult for somebody to understand or remember the market situation clearly.
BUILD UP WITH DOLLAR COST AVERAGING
One should remember that in the business cycle, during economic slow dow, the stop market usually have negative years. Best option for long-term investors is taking advantage of dollar-cost averaging (DCA). Which implies purchasing shares despite of price, this helps somebody to buy shares at low price when the market is down. At the long run, cost will ( average down), leaving one with a better entry price for his/her shares.
Whenever there is a bear market, the bear rule and the bulls are not favorable. The old saying that the best thing to do during a bear market is to play dead. It’s the same rule as of one met a real grizzly in the woods. It is deadly to fight back. Staying calm is the best option to avoid being a bear’s meal. In financial terms ( playing dead) means putting a larger portion of ones investment in money market securities, like certificates of deposit (CDs), U.S.A. Treasury bills and other instruments with high liquidity and short maturities.
This means spreading percentage of ones investment among stocks, bonds, cash and alternative assets. The way one spread up (diversify) his/her investment depends on his/her risk tolerance, time horizon, goals etc.
Investors are facing with different situation. If the assets are properly distributed, the potential negative effects of placing all eggs in one basket will be avoided. Investors should diversify their investments.
INVEST ONLY WHAT YOU CAN BEAR TO LOSE
It is good to invest; but not advisable to take short-term funds and invest them in stocks. Generally, investors should not be involved in equities that don’t have an investment horizon of at least five years, preferably longer and should not invest money that they can’t bear to lose. It should be noted that bear markets, and even minor corrections are dangerous.
LOOK FOR GOOD VALUES
Investors can be favored by bear market. Knowing all the descriptions of stocks during a bear market; such as Beaten up. Battered, underpriced provide great opportunities for investors. Bear market is a window of buying opportunity for value investors such as Warren Buffet because estimated value of good companies get sanctioned companies and sit at very attractive estimation. During falling stock prices Buffet commonly builds up his position in some of his favorite stocks because he understand that the market’s nature is to punish also good companies by more than they deserve.
Profit can be made from falling prices in many ways. One of the ways is short selling, which involves borrowing shares in a company or ETF and selling them. Believing to buy them back at a lower price. This requires margin accounts, but if market’s rise and short position are called in, causing the price even higher.
It could lead to huge losses.
Another way is put option which gain value as prices falls, it guarantee some minimum price at which to sell a security and effectively establishing a floor for ones losses of the person is using it to hedge.
Ability to trade options in brokerage account is needed to buy puts.
Inverse exchange-traded funds (ETF) is another choice to give investors profit from a falling price in major indexes or benchmarks, like the Nasdaq 100. This funds go up when the major indexes are falling giving room to profit while the rest of the market suffers. ETFs can be purchased easily than short selling or puts from brokerage account.
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