Tips on Surviving the Coming Bear Market

Source: Thinkstock

Source: Thinkstock

Blame it on the ripple effect from the Asian markets; Federal Reserve Chair Janet Yellen hinting at an eventual interest rate hike; or that, statistically, we’ve gone longer than usual without a correction. But no matter what the cause, a bear market is coming. However, that doesn’t have to mean catastrophe for the average investor. With a little precaution, there are ways to help weather and maybe even profit during the coming downward trend. There’s not yet much information indicating if this bear cycle will be a minor market correction or more drastic event, but it’s always best to be prepared. Here are some strategies to consider helping your portfolio survive and perhaps even expand.

Don’t Panic

When you see red numbers and arrows pointing in the wrong direction, don’t sell everything. The hasty move in order to stem the tide of your loss might feel like a short-term solution, but does you no good in the long run. If possible, take a deep breath and remember that most stocks will rebound. Think of your portfolio as a long-term investment and let the market make its corrections. Resist the urge to check on your stocks every few minutes.

But Don’t Be Stubborn

Don’t hold on to that stock no matter what the news, hoping the market will turn around any day now. Instead, this might be a good time to weed out any floundering or underperforming stocks and balance your portfolio. While there is a yearly limit on writing off losses on your tax return, the amount does roll forward, which will be useful when the market turns bullish again. Consider an IRA or funding your 401(k) if you’re investing with an eye towards retirement.

Source: Thinkstock

Source: Thinkstock

Invest Like Grandma

Put your money in stable funds that aren’t very exciting but have performed steadily in the past. Companies with in-demand products that everyone needs, like toilet paper, is a safe bet. There are no guarantees, but investing in essentials carries a much better chance of less fluctuation.

For the Not So Faint-Hearted, Engage in Short Selling

Short selling is a somewhat complex process in which the investor borrows shares and immediately sells them. If the price drops, the investor buys the same stock at the lowered price, making a profit on the difference. Inverse ETFs (profiting in a decline of benchmarks, such as the S&P 500 or Dow) work on the same principle. Short selling can also involve put options (keeping the right to sell stock at a certain price until a specified date.) This is a tricky technique, so tread carefully.

Be Well Diversified

There’s no harm in hedging your bets. Consider low-cost exchange traded funds, both for the U.S. market and internationally. iShares MSCI USA Minimum Volatility (NYSEARCA:USMV) is one example of a broadly diverse fund to look into.

Look for Undervalued Stock. It’s the classic “buy low, sell high” mentality. Identify  stocks with lower than anticipated prices from solid companies and purchase them, selling when the market trends back up.

Be Aware of Market Trends. This is true for those who need to stem their losses or are able to ride the cycle out. stocks follow market trends 75 percent of the time. Being aware of these trends in a tricky investment period will help minimize any nasty surprises. Plus, knowing when the bull market is returning will help you capitalize on any undervalued stock you may have purchased.

Move Your Funds to Cash. There’s nothing wrong with moving your funds to cash for an emergency fund, especially considering the Fed’s recent announcement that interest rates could rise. Short maturity bonds and ETFs are another option, since while they have a smaller yield than long maturity options, there is much less volatility.