What to do during a Bear Market

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When the bear markets come, it’s best to know what to do before it swipes down all of your profits and gains. Check out the following for some tips and hacks for the bearish times.




Growth Stocks

If it seems that a bear market could be around the corner, you should get your portfolio in order by determining the relative risks of each asset you are holding, whether it’s an individual security, a mutual fund, or even hard assets like real estate and gold.

During bear markets, the stocks that are most vulnerable to falling are those that are richly valued based on current or future profit. This usually translates into growth stocks, with price-earnings ratios and earnings that are higher than the market average, slumping in price.

Value Stocks

These kinds of stocks may outperform the broader marketindexes due to their lower price-earnings ratios and perceived earnings stability. Value stocks also usually come with dividends. During bear markets, this income becomes highly valuable.

Even though value stocks are usually ignored during bull markets, there’s usually an influx of investor capital and general interest in these companies when markets turn sour.

Lesser-known Stocks

Many younger investors usually focus on companies that have outsized earnings growth and by extension higher valuations operate in high profile industries or sell products with which they are personally familiar.

There’s really nothing wrong about this technique. However, when the markets fall broadly, it’s a great time to explore some lesser-known industries, companies, and products. They may appear stodgy, but this very nature is what makes them valuable like gems when it comes to bear markets.

Read also: Understanding Stock Market Crash 

Defensive Stocks

In working to spot the potential risks in your portfolio, focus on company earnings as a barometer of risk. Companies that have been growing earnings at a fast clip probably have price-earnings to go along with it.

In addition, companies that compete for consumers’ take-home income may have a harder time meeting earnings targets if the economy is going south. Such companies include entertainment, travel, retail, and media firms.

You can choose to sell or trim some positions that have performed especially well compared to the broader markets. Bear markets would be a good time to do that. Even if the company’s prospects may stay intact, the markets usually drop regardless of merit.

See also: Beginner's Guide to Defensive Stocks 

Options

Another way help safeguard your portfolio losses is to use options contracts. If you are feeling that a bear market is around the corner, then selling calls or buying puts may be a smart move if you are already familiar with how options work.

If you feel that the bear market is closing in on an end and economic indicators are hinting at a possible increase in the near future, it may be time to buy calls and sell puts. 

A properly called purchase of puts or calls at the right time can substantially cushion the blow of a bear market, as can the extra income generated from selling them.

Selling Short

Shorting stock can be another good way to gain some profits in a bear market. This practice involves borrowing stocks that you will sell while the price is high and then buying it back after the price slides. 

Of course, just like with options trading, there are risks involved. If the stock price continues to rise after you have sold short, you will lose big money.

However, this can be another effective method of generating income in a down market if your timing is right.

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