The bear market is a reality. However, it is difficult to predict how long it will take and how much it will affect the stock price. Bear markets are a natural part of the market cycle, so you can not only survive but also benefit from them.
Here are a few techniques you can use to reduce your portfolio losses or capitalize on a bear market.
Bear Market Definition
A bear market is when stock prices fall and fundamentally negative sentiment continues to fuel sentiment. Pessimism is growing as investors expect losses in the bear market and continued selling. In most cases, numbers may differ, but some broad market indices such as the Dow Jones Industrial Average (DJIA) and the S&P 500 are down more than 20%.
A period of one month is considered a bear market entry. When stocks start to fall, it is difficult to know when they will fall. If you wait too long and your inventory grows again, you will lose the ability to buy dives and will not be able to profit from the price increases. But if you pull the trigger quickly, you will find that the new rates are much lower. Determining the best time to do this and managing active trades when a bear market starts can be tricky.
10% fix is ok. Most investors can handle this. This is the 78% retracement of the bursting 2000-2002 tech bubble, or the 54% retracement lost for the Dow Jones Industrial Average for most investments between 2007 and 2009.
In bull markets, a 10% correction often pacifies the public by saying, “Wait, don’t panic, buy more.” Support the Wall Street cheerleaders. You can offer to buy dividend stocks as a hedge. However, a 5% dividend is often little consolation when the market drops 10% and then 40% or 50% when you factor in the lost money with whatever you have in your pocket.
What do you need to do to truly control your losses and make money in the bear market? Here are some strategies for overcoming the next bear market:
Index Funds / ETFs
The lesson from the 2007-2009 bear market is that if you regularly buy index funds up to 401 (k), they will rise rapidly when the market finally recovers. Those who use this strategy don’t know if the bear will end in December 2007, June 2008, or eventually in March 2009. Some investors believe the 401 (k) will split in half at the end of the bear market. But when the market finally turns and rallies, all stocks have lower returns.
The people who live there compensate the companies by buying the cheapest stocks during the recession (and getting more for all the money they got back and the stocks they bought before the 2006 highs – they bought them in 2007). … a history lesson is that it is better to invest small amounts regularly than to risk everything at once.
Options / Buying Puts
Another useful strategy when you think the market is bearish and you have a fairly long position in the market is to buy cheap buy and sell options on the leading indices.
Derivative trading is often associated with margin requirements and may require special access to your brokerage account. A put option is an option that is a right to 100 shares, has a fixed duration, has no value, and has a specific selling price. If you buy put options on 30 industrial shares of the Dow, S&P 500, Nasdaq and the market goes down, the value of the put rises with the fall in the index.
Options rally much faster than stocks, so a small number of short contracts can offset the loss of long positions in the stock. As the expiration date approaches, you can sell the put option or exercise the stock and withdraw from the open market. This is a very risky strategy and requires experience before trying it for the first time.
Selling Puts
Selling a put option involves selling a put option that someone else wants to buy at a premium. There is no shortage of interested buyers in a bear market. When you sell a purchase agreement, you want the sale that exceeds the transaction price to end without value. In this case, you can make a profit by holding the full premium and the trade will be completed.
However, if the share price falls below the strike price and the holder of the put option exercises the option, then the losing shares will definitely be received.
Premium provides protection against shortages. For example, suppose you sell a put on July 21 with a strike price of $ 10 and your premium is $ 0.50. Offer pillows up to $ 9.50 break even.
The best strategy is not to sell short put options to powerful companies, as short options are beneficial for derivatives trading. No problem, especially if you have to pay dividends.
Even in a bear market, stocks can sometimes rally to benefit from short-term selling. But be careful. If the market continues to fall, short positions can lead to significant losses.
Discover Stocks / Assets That Benefit and Rise During Bear Market
This is useful for identifying stocks, sectors, or assets that did rally (or at least hold off when the market falls) in a recent bear market. Precious metals like gold and silver could be better.
Food and grooming, often referred to as “defensive stocks,” usually works well. Bonds can rise when stocks fall. Certain market segments such as utilities, real estate and healthcare may still function if they are depreciated in other segments.
Many financial websites provide results for different industry periods, so it’s easy to see which sectors are performing better than others at the moment. When a sector is doing well, it usually lasts a long time. So, start by allocating funds for this sector. This strategy also helps investors charting as bear markets can have different catalysts.
Conclusion
As you can see, there is no need to be afraid of a bear market, but with some alternative strategies, this can work well with many others who are suffering significant losses in their portfolios.
