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How to Deal with Bear Market (Part 2)

Annelis by Annelis
September 13, 2020
in Asia Trade, trading strategy
bear market
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Take a look at previous article to know the other strategies to deal with bear market. Here is the rest strategies from investopedia. There are Diversify, Invest only what you can afford to lose, look for good values, take stock in denfensive industries, and go short.

Diversify

Having a percentage of your portfolio spread among stocks, bonds, cash, and alternative assets is the core of diversification. How you slice up your portfolio depends on your risk tolerance, time horizon, goals, etc. Every investor’s situation is different. A proper asset allocation strategy will allow you to avoid the potentially negative effects resulting from placing all your eggs in one basket.

Invest Only What You Can Afford to Lose

Investing is important, but so is eating and keeping a roof over your head. It’s unwise to take short-term funds (i.e., money for the mortgage or groceries) and invest them in stocks. As a general rule, investors should not get involved in equities unless they have an investment horizon of at least five years, preferably longer, and they should never invest money that they can’t afford to lose. Remember, bear markets, and even minor corrections, can be extremely destructive.

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Look for Good Values

Bear markets can provide great opportunities for investors. The trick is to know what you are looking for. Beaten up, battered, underpriced: these are all descriptions of stocks during a bear market. Value investors such as Warren Buffett often view bear markets as buying opportunities. It is because the valuations of good companies get hammered down along with the poor companies and sit at very attractive valuations. Buffett often builds up his position in some of his favorite stocks during less-than-cheery times in the market because he knows the market’s nature is to punish even good companies by more than they deserve.

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Take Stock in Defensive Industries

Defensive or non-cyclical stocks are securities that generally perform better than the overall market during bad times. These types of stocks provide a consistent dividend and stable earnings, regardless of the state of the overall market. Companies that produce household non-durables—such as toothpaste, shampoo, and shaving cream—are examples of defensive industries because people will still use these items in hard times.

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Go Short

There are ways to profit from falling prices. Short selling is one way to do so, borrowing shares in a company or ETF and selling them. Then, hoping to buy them back at a lower price. Short selling requires margin accounts, and could cause harmful losses if markets rise and short positions are in. It may squeeze prices even higher. Put options are another choice, which gain value as prices fall. And also guarantee some minimum price at which to sell a security, effectively establishing a floor for your losses if you are using it to hedge. You will need the ability to trade options in your brokerage account to buy puts.

Inverse exchange-traded funds (ETFs) also give investors a chance to profit from a decline in major indexes or benchmarks, such as the Nasdaq 100. When the major indexes go down, these funds go up, allowing you to profit while the rest of the market suffers. Unlike short selling or puts, these can be purchased easily from your brokerage account.

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