When we say
we’re in a bear market, we simply mean that the market is crashing down so hard
it’s hard to see in the rubble. Well, it’s a disaster for many, but that doesn’t
mean you can’t ride out the storm. There are ways to survive it, but we’ll tell you
that later. Let’s first get into what you have to know about the bear market.
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| Take a look at our list below to know how to weather a bear market storm! |
Demystifying
the Bear Market
The term market crash can sometimes be confused with a market correction. It’s important
to know whether you’re already inside a bear market, or you’re just peeking at
the possible cliff of a market crash.
To differentiate:
a market correction typically refers to just a 10-percent fall. Generally, a
market correction is a good buying opportunity for you. And if you got good buys
during the correction, you’re in for a treat. This is because there will almost
always be a longer bull phase that follows a correction.
Now, when
the fall exceeds 10 percent and extends to 20 percent, you should begin bracing
yourself. You’re about to enter a change in phase—you’re in the bear market
territory.
A Little
Bit of History
According to
studies, the world has seen more than 30 bear markets since 1900. You do the
math, and you’ll come up with...one bear
market every roughly 4 years.
Historically,
the stock market takes its precious time climbing up the ladder. And when it
decides to skydive, it falls quickly, roughly, and disastrously. You won’t have
time to breathe—if you forgot to do your homework.
According to
experts, a bear market typically lasts for 15 months, and the average drop is around
30 percent.
Short
Sellers’ Buffet
Though some
people say that short selling in the stock market is unethical (because you’re
practically hoping that a company further declines), remember that the huge
names in the investing world are short sellers. Some of them even landed the
top ranks around the world.
Now, if you’re
not too crazy about the idea of short selling, you can always protect yourself
by dip-buying extreme drops. It won’t give you as much money as short selling,
but you’ll get geared nonetheless.
You can
also increase your cash exposure. If you can’t sleep at night thinking that the
market might see a nastier fall, go up and start selling some of your weakest
links. Nothing feels more reassuring that holding cold cash in the palm of your
hands.
Read further: 5 Powerful Risk Management Tips for Starters
Now here are
the Strategies
Let’s now
imagine that the bear market has already started, like, a few moments ago. What
should you do? Let’s get into the strategies.
Grab Cold
Cash
When we say
grab, we mean go 100-percent cash. Jump off the ship. Many people think that this
is a desperate move to avoid losses in a bear market—but that’s exactly what
you want to do!
The good thing
about this is that you can sit back, watch TV, see investor scurrying around
and holding on to their precious assets, and drink that cold bottle of Budweiser
in the comfort of your house.
After the
bear market has passed, you can get back in the game. It’s much like playing
dead when you meet a real, vicious bear. The only problem you might face is the
so-called “sucker rallies.” These sucker rallies are like sucker punches. You comfortably
get in and ready to start anew, and then you realize something hit you in the
back of your head: the market is crashing again!
Sucker rallies
have fooled a lot of other investors. What you can do is to act upon
fundamentals. Check everything out and explore all avenues before re-entering
the market.
If you
really think it’s awful to jump off ship and leave all other investors in there
sinking, you can just try to go partially into cash.
Portfolio
Hedges
If you’ve
been trading for a while, you may have noticed that some securities can provide
some protection to your portfolio. Some of them even have a hedge that can move
toward the opposite direction of major indexes.
Before you
grab these things tight, you first need to check yourself. The suitability of those
securities depends of your skills, knowledge, and risk tolerance. If you do everything
right, you might these strategies offsetting a big portion of your portfolio’s
big losses.
Caveat:
remember that if the market suddenly rallies, you can still suffer huge losses
since these types of securities move in the opposing direction.
Use Stop
Loss Orders
If you
really want to fortify your portfolio against the downsides, stop loss orders
can give you a hand. Stop loss orders are orders placed under the current
price. If a stock you hold slides down to the predetermined price, it will be
sold—automatically.
In addition,
you have the choice to keep your portfolio if all the Stops are reached. You
can also raise them higher if the prices go up.
However,
stop loss orders are not perfect. They can’t guarantee that the stock will be
taken care of at the price you set. Why? If the stock price slips below the
stop price, you may get the lower price.
Be Active
This is not
suitable for all investors. Being an active trader doesn’t only mean day
trading. It means that you have to watch a particular security and trade it from
one point to the other. You cannot care if it goes farther up.
You have to
be willing to take losses if your trade doesn’t go the way you wanted it to.
But if you can do it right, it can put more percentages of return to your
portfolio’s performance.
It goes without
saying that you risk losing money easily. You can imagine them flying away from your
pockets. Other scenarios can include you being too greedy and being too eager
to trade and trade and trade. When that happens, your losses can pile up
rapidly, stacked on top of each other and reaching the roof.
Read more about protecting yourself against risks. See Spreading Out Investments for Reducing Risks
Conclusion
It’s not
far-fetched that the bear market will always come back to hunt investors, no
matter how good the market looks like right now. And you can’t make it
disappear forever. You can only strengthen your portfolio, prepare your
strategies, and anticipate all the possible twists that the market can offer.
Test
your skills in stock trading at FSMSmart! We will provide you with daily
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