7 Things To Do In A Bear Market
Many of you must have heard the terms – bull market and bear market. What do these terms mean? Basically the terms “bull” and “bear” are used to indicate market conditions/trends of the stock market. A bullish market is one in which the stock prices are rising and are expected to rise. Such a market encourages buying and inflow of money into the market by the investors. On the contrary, a bearish market is one in which the stock prices see a downfall. Generally this will lead to the investors selling the securities they own, thus pulling out their money from the stock market.
A bullish market is welcomed by investors as it means rise in the prices and higher profits, but a bearish market is generally seen as a fearsome scenario. Many people suffer losses and sometimes even huge losses as the prices fall.
However bear markets are inevitable and rather than viewing it as an unfavourable period, one should take it as a phase which shall definitely upturn one day when prices start to rise again and maybe also as an opportunity to invest in stocks when they have reached their lowest possible prices. This is because since years we have seen that the stock market goes in cycles of highs and lows and these cycles are in close accordance with the economic cycle. A stock market relies hugely on the “investor sentiment” and this sentiment depends on how the economy is performing and what are the forecasts. Hence we can predict the state of the market based on economic indicators and this can help you make investment decisions.
Now, when the market is approaching a bearish state, these are some of the strategies you can employ:
- Check Asset Allocation – focus on Bonds:
First and foremost, you must check your asset allocation. You should find out how much of your investment is in stocks and how much is in risk free instruments like bonds. Since bonds have a fixed interest, they are less likely to generate losses when the market sees a downfall. So, you should modify your portfolio in such a way so that you have more government or treasury bonds as they guarantee a steady income stream. Also, with falling markets, confidence in safe avenues such as Gold rises. So, you might think of investing in Gold (physical or ETF – electronic trading fund).
- Beware of Growth Stocks:
Next, you must analyze the companies whose stocks you own and find out the relative risk of each security that you hold. Generally in such a condition, the stocks that are most likely to fall are those that are highly valued based on their current or future performance or profits. Growth stocks are stocks of popular companies which are highly valued by the public and generally come crashing down in a bear market.
- Stock on Blue Chip Stocks:
It is important to know that bear markets will always come and go and just because the market is falling at a given moment does not mean that you change your entire investment plan. However, you should always try to have diversity in your portfolio and you should try to include certain blue chip stocks in it. Blue chip stocks are the shares of some exclusively quoted companies. These stocks may be having slow growth, but they generally give out growing dividends almost every year and they carry negligible risk. The negativity in the market hardly affects them and you can rely on theses stocks for generating steady revenue.
- Invest in Bear Market Mutual Funds:
There are some mutual funds which are specially designed for the bear markets. These are portfolios which are considered to be the best performing securities in the market conditions prevailing at that time. They might have utility funds which generally pay a steady dividend. They might also include securities like precious stones or real estate. However, it is always wise to analyze the portfolio and not blindly invest in the mutual fund.
- Short-Selling Funds:
Many of the mutual funds offer short selling stocks which means that you borrow a security and then sell it, hoping the prices decline before replacing them. However, these are highly volatile and risky. Investing in these funds might help you make a profit even when the market is seeing a downturn. These funds are only for investors willing to take a risk and looking for short term investments.
- Look for Inverse ETFs:
Another way to cushion your portfolio from the falling prices would be to invest in inverse ETFs. An inverse ETF is an exchange traded fund which is constructed in such a manner so as to make profit for its holder when the prices decline in the market. They perform inverse to the index of the stock that it tracks, thus the name. The good part about these is that you do not need to have any margin account for buying these exchange traded funds. Hence these are popular investments during the bear market.
- Consider using Options:
Sometimes when you believe that a bear market is approaching, it would be good to issue selling calls or buying puts via options. Hence options can help you reduce your losses and safely navigate in a bear market. Further, when you feel that the market is set to rise, you can then switch back to selling puts and buying calls.
What we see above are only some of the many methods you can use to invest in a bear market. Just because you see a bearish market approaching does not mean you pull out your investments. There are lot of alternatives to the stocks that you generally invest in – you can consider “foul market stocks” which are made specifically to perform in these bad times.
No matter what your approach is, the universal rule that must be kept in mind is – do not put all your eggs in one basket – which means, it is essential for you to have a diverse portfolio. That said, one of the best advice given to all investors since ages is “Buy on the dip – think long term!” The temporary lows can be seen as an opportunity for buying stocks at the lowest price! If you stick with a well performing and well reputed company through the highs and lows, you are bound to do well and grow with the company. Thus, a bear market helps you grow wiser and judge your skills as well as your ability to take risks and deal with hard times.
We hope you learned how to make the best possible use of bear market scenario. For regular updates, subscribe us via email and we will deliver our next article, right in your mailbox!