How to survive the next bear market?

Bear markets are difficult to predict. It’s hard to know how long they will last or how much they will affect share prices. Since bear markets are a natural part of market cycles, you can survive them. Moreover, you can position yourself to take advantage of them. Here are some methods you can use to cut losses on your portfolio or even get some money out of the bear market.

Should we sell?

Many investors get nervous during these times. That’s when we have to reassure ourselves to stay in the market and then re-evaluate our goals. A part of market failure stems from short-term thinking most of the time. Before selling, we must take into account several factors. First, look at our time horizon. If you are investing for the long term – for retirement, for example – then there is a strong probability that the market will recover before you have to use the funds.

Second, consider your alternatives. If you withdraw your money from equities, where are you going to invest? Remember that stocks have outperformed the other classes of equity assets – bonds and money market securities – by a significant margin in the long run. However, past performance is no guarantee of future results.

Maintain an appropriate portfolio

If you haven’t, take a good look at your investments. As long as your portfolio matches your risk tolerance, it would be best if you were better prepared to handle these types of market swings.

Reviewing your asset allocation can help you answer another question about your portfolio: Is the level of diversification adequate? In other words, do you have your money separated into different investments to help reduce risk potentially? It is the idea of ​​not having all your eggs in the same basket. Different values ​​perform better at different times. For example, a more conservative strategy may precisely serve worse than an aggressive strategy in the short term. Reviewing your goals will help you define the correct portfolio allocation.

Place a stop-loss order

Stop losses are sell orders that you place around specific support levels. The idea here is that if the price reaches this point, it will likely go down because it has broken support.

They are also the primary way to mitigate your risk in a transaction. If your loss limit is set 9% below entry, that means that if things go wrong and prices start to drop, you are limited to a 9% loss on your equity. It’s not great, but it’s a lot better than getting stuck holding the equities as prices continue to drop. If you don’t set a stop loss in a bear market, your capital will lock in the market. At this point, you are no longer a trader because there is nothing you can do.

Finding the assets that increase the price

It’s helpful to research how bear markets performed in the past to find out which stocks, sectors, or assets increased in their value. 

Sometimes precious metals, like gold and silver, are better than them. Food and personal care stocks always work well. There are times when bonds climb as stocks fall. Sometimes a particular sector of the market, such as utilities, real estate, or healthcare, can perform well, even if other sectors are losing value.

Many financial websites post sector representations for different periods. You can easily see which sectors are performing better than other ones. Start by allocating some of your cash to those sectors. 

As you can see, a bear market is not something to be afraid of. Using a few alternative strategies, we can do well when many others are suffering heavy losses on their portfolios.