Smart Strategies for a Bear Market 2022

Key insights come from major market events First, diversification is key. It is a fundamental principle of long-term success and overcoming volatility. It is important to ensure that your investments are diversified. No one can predict the future, so a well-diversified portfolio is important. Spreading your investments globally across a wide range of asset classes, including equities and fixed income, can help reduce your risk. Another universally accepted lesson - stick to your plan and stay invested. The COVID-19 crash and recovery was the fastest bear market recovery in history, highlighting the importance of staying invested and not selling investments due to traumatic market events. Those who continued to invest during the pandemic are reaping huge returns from the market recovery. Keep your worries under control There's an old saying on Wall Street: "The Dow climbs the wall of worry. In other words, over time, the Dow continues to rise despite economic hardship, terrorism, and countless other disasters. Investors should always try to separate their emotions from investment decisions. What appears one day as a massive global disaster may be remembered years later as nothing more than a blip on the radar screen. Remember that fear is an emotion that can cloud rational judgment about a situation. Keep calm and carry on! Accumulate with dollar cost averaging The most important thing to remember during an economic downturn is that it's normal for the stock market to have negative years - it's part of the business cycle. If you are a long-term investor (that is, with a time horizon of 10+ years), one option is to take advantage of dollar cost averaging (DCA). By buying stocks regardless of price, you end up buying stocks at a low price when the market is down. In the long run, your costs will "average out" and give you a better overall entry price for your shares. Play dead During a bear market, the bears rule, and the bulls don't stand a chance. There's an old saying that the best thing to do in a bear market is to play dead—it's the same protocol as if you encountered a real grizzly in the woods. Fighting back would be very dangerous. By staying calm and not making any sudden movements, you will save yourself from being a bear's lunch. Playing dead in financial terms means putting more of your portfolio into money market securities such as certificates of deposit (CDs), US Treasury bills, and other highly liquid, short-maturity instruments. Diversify Spreading a percentage of your portfolio between stocks, bonds, cash and alternative assets is at the heart of diversification. How you divide your portfolio depends on your risk tolerance, time horizon, goals, etc. Every investor's situation is different. The right asset allocation strategy allows you to avoid the potentially negative effects of putting all your eggs in one basket. Only invest what you can afford to lose Investments are important, but so is eating and keeping a roof over your head. It is not wise to take short-term funds (ie mortgage money or groceries) and invest them in stocks. In general, investors should not get involved in stocks unless they have an investment horizon of at least five years, preferably longer, and should never invest money they cannot afford to lose. Remember that bear markets and even minor corrections can be extremely destructive. Look for good values Bear markets can provide great opportunities for investors. The trick is to know what you're looking for. Battered, battered, undervalued: these are all descriptions of stocks during a bear market. Value investors like Warren Buffett often see bear markets as buying opportunities because the valuations of good companies are knocked down along with poor companies and sit at very attractive valuations. Buffett often builds his position in some of his favorite stocks during less fortunate times in the market, knowing that the nature of the market is to punish even good companies more than they deserve. Take inventory in the defense industry Defensive or non-cyclical stocks are securities that generally outperform the overall market during bad times. These types of stocks provide a consistent dividend and stable profit regardless of the state of the overall market. Companies that make non-perishable household products—such as toothpaste, shampoo, and shaving cream—are examples of defensive industries because people will continue to use those products during tough times. Abbreviation There are ways to profit from falling prices. Short selling is one way to do this, borrowing shares of a company or ETF and selling them - hoping to buy them back at a lower price. Short selling requires margin accounts and could cause damaging losses if markets rise and short positions are covered, pushing prices even higher. Another option is put options, which gain value when prices fall, and which guarantee a certain minimum price at which the security can be sold, effectively setting a floor for your losses if you're using it to hedge. You will need the ability to trade options in your brokerage account in order to buy puts. Inverse exchange-traded funds (ETFs) also give investors a chance to profit from declines in major indexes or benchmarks, such as the Nasdaq 100. When the major indexes fall, these funds go up, allowing you to profit while the rest of the market suffers. Unlike short sales or puts, they can be easily purchased from your brokerage account. Why is it a good idea to continue investing through bear markets? In the long run, the stock market tends to rise and the economy grows. While bear markets can interrupt this otherwise bullish trend, these declines have always ended and eventually reversed to make new highs. By investing through bear markets, you can buy stocks when they are at a lower price ("on-sale") and accumulate stronger positions. Final thoughts Most results come from getting a few main things right: