As an investor, you might have heard of a bear market.
This is actually a market condition wherein the prices of securities are falling. There is widespread pessimism within investors about the market. Because of this negative feeling, investors would continue to sell due to the anticipation of losses.
This only leads to growing pessimism.
Despite this fact, there are still ways to make money from a bear market; or at the very least not to lose money from investments.
Before going into that, you have to completely understand what a bear market really is.
Just because prices go down doesn’t mean it already denotes a bear market condition. Before the market is declared to be in this position, there are certain statistics or data to be looked at first.
Although the exact numbers can vary, most investors have a downturn of 20% or higher across multiple broad market indices (such as the Dow Jones Industrial Average and Standard & Poor’s 500 index) that goes beyond at least a two month period would then indicate a bear market condition.
It is also important to note that you should not confuse a bear market with a correction which is always a short term trend that lasts less than two months. Also, corrections offer great entry points into the market while bear market very, very rarely offer these opportunities.
During a bear market, it can be extremely dangerous to fight back.
It is hard to make huge gains during this condition because of the fact that predicting the bottoms can be very difficult.
But this does not mean all is lost. There are ways to continue making money and protecting yourself during this time.
Most investors opt to ride out this market condition in hopes of avoiding losses. They do this by hanging onto their stocks instead of selling them. There is nothing wrong with this except for the mentality of most investors during this time which is pessimistic. Because of this, people tend to panic easily and sell when the market hits the bottom or sell at completely wrong times.
When it comes to bear market strategies, the important thing is to be able to manage your risk properly.
That in mind, a good strategy is a very conservative fixed-income option.
How do you do this? Well, a couple of years back there were some investors who actually took the high price to earnings ratio as a clear signal to invest in bonds. This gives a modest return in an investor’s portfolio even when the market is down.
You can also make use of the “Mad Money” stock trading option. This is good for active traders, but the most important thing to remember here is that this is a full time job. You will always have to monitor the market, look for signs, and adjust to every movement as seen fit. If you cannot devote this amount of time, then do not go for this strategy.
Another good way to protect yourself during this market condition is to go with a fund that has stocks the managers think would gain and that they sell short stocks. Long-short mutual funds are considered to be safer than hedge funds since they are declared with the Securities and Exchange Commission so they disclose their holdings every quarter.
After all is said and done, if you simply aim to not lose money during a bear market to protect yourself, do nothing. Ride out the market condition and do not give in to temptation and sell. Do not give in to your emotions and panic. Simply wait for the market to return to normal then make your moves again.
This is a guest article from IDLWave Investing.