A bear market refers to a market in which the prices of securities take a dip resulting in significant losses. It is quite difficult to recover from according to investors, and as selling continues, so does their pessimism regarding its future. Even though the figures may differ, if broad market indexes as the Dow Jones Industrial Average suffer a 20% downturn or more within two months, that means they have effectively entered this market.
Bear markets can take a large bite out of returns. On the other hand, if investors are able to avoid the downturns while taking part in the upswing, i.e. the bull markets, they can enjoy profitable returns.
However, that situation is very rare and requires investment skills that amateurs cannot hope to emulate if they don’t have significant experience dealing with the stock market. If you are facing a bear market, the best thing you can do is adjust your portfolio so that you can prevent more losses. These changes are a combination of asset allocation amendments and switches within a portfolio.
How to Avoid Losses from a Bear Market
There are a number of things you can do to save yourself from losses in case a bear market is imminent. The following are some of them in detail:
Reorganize Growth Stocks – If a bear market is imminent, the first thing you need to do is to reorganize your portfolio. You can do that by figuring out the risks of your holdings like mutual funds, a single security or any other assets you have. Stocks that are the most vulnerable in a bear market are high in value according to existing and future profits. If the market comes crashing down, the value of these growth stocks will be the first to fall.
Value Stocks – When markets take a turn for the worse, or you find yourself in the middle of a bear market, your value stocks may save you. They usually outperform broad market indices since they have lower P/E ratios and there is also an influx of capital investment from investors who wish to purchase them during this time.
Unpopular or Lesser Known Stocks – Most young investors usually turn their focus on organizations that have high valuations, belonging to high profile industries or which specialize in selling popular products. If you are facing a bear market, this strategy can give you the perfect opportunity to explore potentially profitable new markets, industries and products.
Further Reading
- Stability tests for alphas and betas over bull and bear market conditions – www.jstor.org [PDF]
- Two centuries of bull and bear market cycles – www.sciencedirect.com [PDF]
- Asymmetric beta in bull and bear market conditions: evidences from India – www.tandfonline.com [PDF]
- Bear market periods during the 2007–2009 financial crisis: Direct evidence from the Visegrad countries – akjournals.com [PDF]
- Mutual fund systematic risk for bull and bear markets: an empirical examination – www.jstor.org [PDF]
- Do higher oil prices push the stock market into bear territory? – www.sciencedirect.com [PDF]
- Predicting the bear stock market: Macroeconomic variables as leading indicators – www.sciencedirect.com [PDF]
- Monetary policy and stock market volatility in the ASEAN5: Asymmetries over bull and bear markets – www.sciencedirect.com [PDF]
- The behavior of Japanese individual investors during bull and bear markets – www.tandfonline.com [PDF]
