To successfully invest in a Bear market, you will need to know the meaning of a Bear market and how it works. A Bear market is a situation where security prices fall 20 percent or more over a sustained period—usually two months or more. During a Bear market, there tends to be widespread negative news around investments. This can result in investors losing confidence in stocks. Investors may begin to sell their shares to cushion the effect of potential losses. A Bear market situation will arrive as a result of investors anticipating a downturn in stock prices after a period where stock prices have been relatively high.
This anticipation, and the fear that stock prices will plummet, can cause investors to sell off their shares. It can even lead to widespread panic. Bear market situations are tricky, and even smart investors can lose their head. Here’s a list of tips that can help you make smarter investing decisions in a stock market.
Invest in Index Funds Through a 401(K) Plan
An index fund is a kind of mutual fund with a portfolio devised to match the components of a market index. An index mutual fund is believed to provide broad market exposure, low portfolio turnover, and a small operating expense. Index funds adhere to certain rules/standards (for instance, efficient tax management or reducing tracking errors) that stay in place irrespective of the state of the markets. The 401(k) plan is a retirement plan sponsored by qualified employers, where eligible employees may make salary-deferral contributions to the retirement plan, on a post-tax or pre-tax basis.
Learning from the lessons of the Bear market condition of the 2007-2009, people who bought index funds at regular intervals through the 401(k) plan, made quite a substantial amount when the markets finally rebounded. By the time the Bear market period ended, some investors had reported losing about half their 401(k) plan. However, all the shares bought on the way down appreciated when the market finally did rebound. Using this strategy, it is best to invest small amounts at regular intervals rather than jumping in and investing colossal amount all at once. To learn more about index fund investing, take a look at another one of my articles here.
Buy Short Term and Long Term Puts
If you have a reason to believe there is a Bear market situation approaching, you could buy cheap short and long-term puts on the major indices. A put is an option contract that gives the owner the right (not the obligation), to sell a specified number of an underlying asset (financial assets upon which a derivative’s price is based) at a set price within a stipulated time.
If you buy puts, and the market declines, your puts will appreciate as the indexes fall. You will be surprised at how quick a few put contracts can offset your long position stock losses; this is due to the fact that put options increase and decrease by a percentage more substantial than stocks. This article will teach you everything you need to know about investing in put options.
Invest in High Quality Stocks
In a bear market situation, all stocks take a downturn—stocks from good companies and from bad companies. The thing is, while low quality stocks will remain down, high quality stocks tend to weather the storms of a bear market and rise again. Furthermore, you can get those high quality stocks at lower prices during a bear market; bearing in mind that a bear market is not a permanent condition. The trick to buying a high quality stock, is studying companies that have kept a consistent track record of rising from bear market situations. You can also try analyzing companies that deal in stocks that rarely lose value.
Invest in Strong Companies
This is similar to investing in high quality stocks. While stock prices are dictated by how well stocks fare overall in the market, a company might still be making decent net incomes. They may also pay solid dividends to their shareholders. A bear market situation will reveal companies that still make a modest net profit regardless of the stock market situation. You may consider investing in such companies and earning from dividends of the company while the bear market situation tarries.
Study Bond Ratings
Bond ratings tell you about the creditworthiness of a company. They are carried out by independent bond rating agencies. The scores range from AAA, AA, A to Bs, Cs, and Ds. The As are considered the least risky companies to invest in with, the AAA being the most creditworthy. The Bs, Cs, and Ds are dangerous and have poor creditworthiness. A study of these ratings will help guide your investment decisions in a bear market.
A Final Note
Contrary to popular belief, a bear market does not always spell doom. You can make profits while it looms, or you can be patient enough to profit when the more pleasant bull market comes along. With the above-listed strategies, you can ride out bear markets with a clear head. Remember, even the most experienced traders shudder during a bear market. Don’t ever let your emotions take control!