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Five Bear Market Strategies

bear market investing, bear market investing strategies, bear market strategies

Bear markets are difficult times for investors without a clear strategy to win. The strategies you used during a bull market are not appropriate in a bear market. Bull markets tend to create the illusion that everyone is a successful investor. A rising tide lifts all boats. On the other hand, bear markets expose those investors who have not adjusted their portfolios. Bear markets also offer opportunities for investors to develop well founded bear market investing strategies. The following five bear market strategies should get you on the right track.

1. Change your Approach

Bear markets expose every weakness in an investor's strategy. The first step in bear market investing trategies is to change your approach to investing.

An interesting quote is fitting for every investor, when they encounter losses. I could not find who originally stated it, but it goes something like this:

If you always do what you have always done, you will always get what you have always gotten.

Or its corollary:

"Insanity: doing the same thing over and over again and expecting different results."

-Albert Einstein

Investors who lost money in a bear market should not expect to quickly recover what they lost unless then change their approach to investing. Rather, we need to adjust our strategy to reflect we are in a bear market.

My father-in-law is worried about money as the market has cut his holdings in half. I have offered to help him a number of times, but he refuses to sell, believing his stocks will recover. It worked during the bull market, so it should work now, he says. It is hard to change old habits.

Successful investors employ bear market strategies to help them adapt to the market. These investors take a disciplined approach that recognizes the current economic environment and stock market trends. This may require you to take more control over your investing actions, such as selling when the market is going against you, rather than hoping your stocks will recover what they lost.

If you have depended on a broker to advise you on how to structure your portfolio, you probably realize that you need to take more control over your investment decisions, especially in a bear market. There are several excellent books in the Investing Library that can help guide you on your journey. In addition, the Learning Center includes a growing list of articles designed to help investors become proficient and take control of their financial future.

Taking the time to learn how to invest will enhance your financial future. Even if you continue to work with a broker or financial advisor, you will be a better client and help to direct your future. Moreover, you will know what questions to ask of others. Hearing and understanding the answers will go a long way to enhancing your understanding of the economy and the markets. Your portfolio will thank you as well.

2.  Simply your Life

We live in a society where buying and spending is considered the way to happiness. Stop and look at all the stuff you own and ask yourself, why do I need it. Moreover, ask yourself, do I need more of it. I suspect the answer is no. Conspicuous consumption is keeping you from putting away enough money to well but simply.

Recently, my mother-in-law passed away. She owned many closets full of expensive clothes purchased over the years. When my wife and daughter cleaned out the closets, they found about 20% of her clothes and accessories still had their sales tags attached. My wife listed each item for tax purposes, identifying more than 1,200 items of clothing, shoes, and hand bags that were donated. These were expensive items to purchase costing $300 per item or more. That is at least $350,000 at retail.  Just think how much better off my in-laws would have been if they had not spent so much on stuff.

This can be tough to do, but the rewards are great. Not only will you will find that your life is easier, you will have more money in your bank account.

3.  Preserve your Wealth

Preserving your wealth is the third bear market strategy. Many people, myself included, find it hard to sell a stock that you once believed in. If you are in that situation, ask yourself, would you buy that stock today, if you did not own it. If the answer is no, then sell it now. There are better opportunities to make money in a bear market.

I keep receiving emails pushing the next big stock to go through the roof. You probably do as well. Chasing the next big thing always ends up in another loss. Making money in the stock market requires work, just like any other endeavor. Chasing the next stock that is expected to double in the immediate future is gambling, not investing. Besides, playing the slots has a better chance of a return.

If you lost money during the bear market, recovering your losses will not happen overnight. During a bear market preserving your wealth is paramount. To overcome a 50% loss, you must double your money. To say the obvious, it is better to avoid losing the money in the first place. If you have lost money in this bear market, it is important to preserve your remaining wealth.

Close the positions of companies that you would not buy. Rethink your approach to investing, as discussed in in step one above.

4.  Follow the Trend

The fourth bear market strategy is to Follow the Trend. Most of a stock’s price movement is due to the trend of the market and the sector. This is especially important during a bear market when the overall trend is down. However, bear markets are characterized by rallies that can rise 20% or more before turning back down. While your bias on the trend should be to the down side, bear market rallies offer good opportunities to generate profits, if you are in the right sectors that are leading the trend up.

In a bear market the overall trend is down. Therefore, having part of your portfolio in one of the short Exchange Traded Funds (ETFs) is a logical part of your overall portfolio. After all, the long term trend is down in a bear market. Holding an ETF that shorts the market allows you to participate in the down trend.

Another bear market strategy is to employ sector based Exchange Traded Funds (ETFs). Sectors perform differently during the various stages of the business cycle. A portfolio that invests in a diversified set of ETFs concentrated in sectors that should outperform the market, has the potential to generate above average returns and beat the market. Such a strategy can reduce the risk of losses due to exposure to high risk stocks. Moreover, by selling a portion of your holding in sectors that are at their peak of their cycle and reinvesting in those sectors that are expected to perform well in the next few months, you are following a disciplined trend following strategy.

5. Reduce Risk

Investing in a bear market brings home the need to protect your hard-earned money. The fifth bear market strategy is to reduce your risk. This starts with trailing stops to minimize losses and/or capture some profit from an investment. Another important technique is to rebalance your portfolio more frequently. Rebalancing capitalizes on short-term cycles in the financial markets. By selling part or all of the top performers in one asset class or sector, it provides capital to invest in new promising opportunities. A variation of this strategy is to sell part of your position when you have a quick gain to capture some profit and move the stop to or above your entry price.

There are several ways to reduce the risk of losses in a bear market. One method is to close out your long positions and move to cash. After all, cash is a position as well.

Another bear market strategy is to use options to hedge your long positions. Covered calls are a low risk way of providing some down side protection. In addition, protective put options can limit your risk of loosing more than a set amount of money on a stock or ETF position.

A third bear market strategy is to be long in sectors that are likely to do better in a bear market and be short in sectors that are likely to perform poorly in a bear market. This method is a variation of the sector rotation strategy that seeks to follow the economic business cycle.

The Bottom Line

Investing in a bear market requires investors to adjust their investing strategies. It challenges investors to reduce loss of money while offering them opportunities to make nice profits for those with the discipline to do so. By taking the time to develop your bear market strategies, you will prepare yourself for greater financial success. It will also improve the performance of your portfolio.

At Trading Online Markets, we employ all of these bear market strategies to beat the market no matter which direction it is going.

If you wish to read more on how to invest in a bear market I suggest reading:

How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition by William J. O'Neil is an excellent book on how to pick winning stocks.