Falling prices may be a good opportunity to buy the dip in a bull run, but it’s a catastrophic strategy when the price has reversed. Some investors get caught in the hype of rising prices, failing to realize that bear markets follow rallies.
Macroeconomic factors such as inflation, a cooled-off housing market and geopolitical tensions hint that a stock market crash could be imminent. Several major corporations have lost 70% of their market value, making investors jittery about further losses.
While panic-stricken investors scramble to save what’s left of their portfolios, you can deploy several strategies to protect your financial portfolio to minimize losses and potentially profit from a market crash.
How Are Investors Handling the Bear Market?
A bear market may take years to reach the bottom. That gives investors wanting to buy at the lowest prices sufficient time to prepare. But investors already in the market are seeking defensive strategies.
Several options are available to investors navigating a bear market to the most favorable outcome.
Rebalance Your Portfolio
An effective diversified portfolio consists of several asset classes. It’s known as an all-weather portfolio because it offsets asset price declines in one market with the profits in another market. Investors should build a portfolio that consists of stocks, commodities, precious metals and bonds.
But further measures can be taken during market crashes to alleviate the blow. If your investments are solely in stocks, you can sell the poorly performing stocks and opt for a defensive stock sector such as utilities and healthcare, which usually perform well during bear markets.
Government bonds have proven to provide returns during recessions. And gold’s value has historically risen against a falling U.S. dollar. Some experts consider the ideal portfolio weight to be 40% long-term bonds, 15% intermediate bonds, 30% equities, 7.5% gold and another 7.5% in diversified commodities.
Sell Your Holdings
The technical definition of a bear market is security prices dropping 20% or more. The market has revealed that it can drop further than that and form a v-bottom, then rally to new highs. But risk-averse investors may not be able to handle volatility, so the best option might be to sell.
Selling your assets can be the right strategy if you’re unknowledgeable about alternative investments. Having cash when prices have plummeted puts you in an advantageous position. It enables you to buy assets at what some investors call discounted prices. However, timing the market can be challenging as prices can always fall lower.
Investors can make money in financial markets when prices rise and fall. Shorting stocks is a trading strategy enabling investors to open a sell position because they expect prices to fall. It requires opening an account with a day-trading broker that provides margin trading so that you can borrow money.
This strategy is more suitable for experienced traders as it requires a technical and fundamental analysis to determine if the market is bearish. When shorting stocks, you borrow shares of a stock that you believe its value will decrease. You sell borrowed shares to buyers willing to pay the market price. But you must return the borrowed shares, so you ideally buy them at lower prices. If your buy position is priced lower than the short position, the difference is your profit. Short selling is considered a high-risk practice.
Dollar Cost Averaging
Knowing when to get out of the market or how to diversify a portfolio is challenging even for fund managers. If you don’t want to sell any of your assets but want to minimize risk, dollar cost averaging may be a sound defensive strategy when prices are falling.
Dollar cost averaging entails investing a fixed dollar amount regularly, irrespective of the price. This strategy helps you to buy securities at various prices. The key advantage is that you are aiming to buy more shares at low prices and fewer shares at high prices.
It may help lower your average cost per share, reduce the impact of volatility on your portfolio and instill in you the habit of consistent investing.
Best Investments for a Bear Market
Certain assets have proven to be a hedge against recessions. They’ve offered downside protection by limiting losses.
Bonds: Stock investors expecting a slump in the market may opt for bonds. Bond prices tend to move in the opposite direction of stocks. Investors should have a mixture of long-term and short-term bonds to offset equity losses.
Gold: Precious metals such as gold and silver have often advanced during economic hardships. Gold’s value usually increases during inflation and when the stock market plummets. A dollar’s value can drop to zero, but gold will probably always have a value.
Utility and healthcare stocks: Regardless of economic conditions, individuals require energy and healthcare. Companies providing those resources are less likely to experience drastic decreases in revenue.
Some investors are apprehensive about risking large amounts during bear markets, so they opt for minimal investments in the best penny stocks.
Is Copy Trading a Good Idea?
Copy trading enables traders to gain insight into how professional traders analyze markets. It provides confirmation for traders uncertain about a particular position.
Beginners benefit the most from copy trading as it enables them to emulate the trades of professionals and potentially profit without needing skills or time to analyze markets. They can even do it while they’re mobile via investment apps.
Compare the Best Brokers for a Bear Market
Ensure your investing strategies are effective in a bear market by using a reliable broker. Benzinga has compared the best online brokers to help you minimize losses and reduce risk. Investors interested in capitalizing on currency volatility can check out Benzinga’s forex broker comparison.
Frequently Asked Questions
What should investors do in a bear market?
Investing in a bear market requires investors to protect themselves by diversifying their portfolios, practicing dollar cost averaging and investing in hedge instruments such as bonds, gold and defense sector stocks — utilities and health care.
Is the U.S. in a bear market?
The Dow Jones Industrial Average index has dropped less than 20% since its all-time high. The technical definition of a bear market is prices dropping 20% or more. Theoretically, it may not be a bear market, but some companies have lost more than 70% of their market value. Some investors believe that the best time to start investing in stocks is during a crash.