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4 Ways to Survive and Prosper in a Bear Market

Consider and put into practise the following four techniques to help you survive and perhaps succeed in a bear market.

There are four ways to survive and prosper in a bear market: diversify your assets, stay informed and rational, use stop losses, and keep some cash on hand.

A bear market is a time when stock prices fall and investors become more cautious. It can be a scary time for investors, as their portfolios may start to lose value. However, there are steps that you can take to survive and even prosper in a bear market.

One thing that you can do is to make sure that your asset allocation is appropriate for the current market conditions. This means that you should have less exposure to stocks and more exposure to safe havens such as bonds and cash. You may also want.

Don't Panic - The worst thing an investor can do is sell off at a loss when the market is down. Resist the temptation to pull your money out of the stock market when things look bleak. Temporary dips 

In a bear market, even the strongest stocks can fall victim to the overarching trend. Selling off can be a knee-jerk reaction for some, but there are ways to weather the storm and come out on top. Here are Four tips to survive and prosper in a bear market:

TAKEAWAYS IMPORTANT 

Bear markets are unavoidable. That doesn't make predicting them, predicting how long they'll persist, or estimating the depth of the downturn any easier. However, you don't have to be a prophet to take a few cautious strategies to reduce your bear-market losses while also boosting your long-term investing results.
  • Bear markets are difficult to forecast and trade, but they are not cause for alarm.
  • Bear market risks are larger for older investors with large account balances than for younger workers with smaller investments.
  • Diversifying into lower-risk stocks can help to mitigate bear-market losses while also providing long-term rewards.
  • For many investors, going into cash during a bad market is likely to reduce returns if the market recovers.

What Is a Bear Market and How Does It Work?

A stock market fall of 20% or more, as measured by a broad index such as the Standard & Poor's 500 or the Nasdaq Composite, is considered a bear market.

Because stock markets can experience numerous drops of 5% or more, investors may not recognise a bear market has kicked in until their losses have surpassed that threshold.

Investors may be paralysed by indecision and unwilling to take remedial action while their portfolio suffers long-term harm as a result of the losses already incurred, greater uncertainty about the future, and increased market volatility.

While every bear market in history has ended with higher prices, many portfolios that have been wrecked by bear markets have taken far longer to recover, and some have never recovered at all. The first order of business in investing is to protect your money, and nothing drives that point home like a bear market.

3.9% On June 13, 2022, the S&P 500 fell for the first time since March 2020, closing in bear market territory.

During a bad market, however, profits gained at high risk do not count twice. If you're Warren Buffett, it's perfectly acceptable to be greedy when other people are afraid. (In fact, according to the Oracle of Omaha, that's the one moment you should be greedy.) You're not Warren Buffett, and your retirement savings don't require a hero during high-risk periods.

What appears to be a 10% correction or a mild bear market could turn into a 78 percent dot-com bubble implosion from 2000 to 2002, or a 54 percent drop in the Dow Jones Industrial Average from 2007 to 2009. 

So, what can we do to mitigate our losses and perhaps even profit in a bad market? Here are four options to think about.

Average Cost in Dollars

If you invest a set amount in stocks on a regular basis, whether through a 401(k) or a Roth IRA, you will end yourself buying more as market prices fall and less as they rise, somewhat skewing the odds in your favour.

Dollar-cost averaging adds to the advantages of making monthly contributions to any tax-advantaged savings account. Contributions and employer matches typically account for two-thirds of yearly balance increases in 401(k) plans, while investment profits account for one-third. As a result, many 401(k) contributors should be able to swiftly rebuild their account balances after a market downturn.

Of course, many does not equal all, and aggregates hide considerable disparities dependent on the size of the 401(k) balance, among other things. According to one study, those with balances of more than $200,000 lost more than 25% of their money in 2008, while those with balances of less than $10,000 saw their balances grow by 40% as contributions outweighed investment losses.

Calculate the Risk

There's no way around the fact that workers with larger account balances have a lot more to lose in a bear market, and older plan participants have less time to recover any losses before retirement. There is, of course, a lot of overlap between these categories.

In terms of risk and profit, an investor approaching retirement should approach a bear market considerably more cautiously than a younger worker with a smaller account balance. However, this isn't always the case. According to a research of Fidelity Investments' retirement plan participants conducted in Q3 2021, Baby Boomers (those born between 1946 and 1964) were the demographic most likely to be investing too aggressively. In contrast, target date funds were fully invested in 51 percent of GenX plan participants, 70 percent of Millennials, and 85 percent of GenZ.

It's also worth noting that target date funds can lose a lot of money in a bear market, with losses ranging from 23% to 39% in 2008, depending on the target date.

Only you can decide what portfolio allocation will allow you to sleep well at night and protect your future, taking into account your age, financial situation, and risk tolerance. Instead of succumbing to lethargy, the crucial thing is to figure it out and act accordingly.

Ways to Survive and Prosper in a Bear Market
4 Ways to Survive and Prosper in a Bear Market

Diversify without becoming disengaged

Growth stocks are more vulnerable to bear markets than value stocks. Despite their lower risk, lower-risk stocks have produced long-term returns comparable to those of riskier stocks through a fortuitous coincidence. That implies some diversification into value companies, even if it is late and occurs during a bear market, can pay dividends both figuratively and literally long after the bear market is ended.

Cash has a place in a well-balanced portfolio. It represents a reserve of buying power that may be promptly marshalled as the bear market gives possibilities, even if it doesn't generate much yield.

However, if you put a large chunk of your retirement plan in cash during a down market, you'll be faced with the onerous issue of determining if, when, and where to redeploy it, or risk lower long-term returns.

Market timing is difficult, and attempting to do so would almost certainly land you in the red. Participants in Fidelity 401(k) plans who reduced their equity allocation to zero between October 2008 and March 2009 and then re-invested in equities after the downturn gained 25% through June 2011, compared to 50% for those who left it alone.

Between early 2009 and the fall of 2011, the S&P 500 rose 54 percent, leaving many plan participants behind. According to one research of workers aged 51 to 59, the average account balance climbed only 7% over the same time period, with 45 percent of those surveyed seeing a decrease in retirement savings.

Hedge and Speculate Prudently With Options

Only a small minority of options traders profit, while the great majority of ordinary investors who seek the leveraged returns that options can bring lose so much money that economists can only believe they're doing it for fun.

If you're not sure if you're part of the small minority, you most likely aren't. And if you did, you wouldn't be reading this to discover that in a bear market, some option bets can make a savvy or lucky speculator money. Put options or put spreads, especially those purchased following a bad market rise, can be used to hedge long holdings or acquired for a speculative trade, as you probably already know.

At the very least, if you buy a put, the purchase price represents the value at risk. Selling a put, particularly in a bear market, can be substantially more expensive. There's a significant chance the put will be executed when prices fall. Even if you do manage to get a stock you want at a reasonable price this manner, the chances are that future bear-market drops will push it lower.

Final Thoughts

Bear markets are no reason to worry, but they are an excellent opportunity to double-check that your portfolio is adequately diversified and risk-adjusted. Know how much is on the line and how long you have to make up for any losses.

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