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.
Read further: Bear Markets: 4 Ways to Ride Out the Storm
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
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
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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