6 Ways to Survive a Bear Market

The U.S. stock market in 2016 came off to the worst January performance in the history of the stock market. On January 15th Market Watch reported that "U.S. stocks post worst 10-day start to a year in history". That was before the market plunged another 500+ points just two sessions later. It was not just the U.S. stock market, but Europe, Japan, China, and Crude oil performed much worst when 2016 began. In order to weather the storm of a Bear Market, here are six tips we've compiled to help you survive, and maybe even thrive.

Be Content with Cash

One of the things that hurts people during a bear market is the "need" to invest capital at all times. There is nothing wrong with holding your account in cash. Cash is king and if you do not have any other grand strategic plans for a bear market, one of the safest things you can do is go to all cash. The rise of the dollar value as of late, holding your account in cash is as good of investment as any. Since the end of QE in 2014, the dollar has increased about 25% and that's hard to beat with the S&P even during the good years!

Buy Insurance

One of the things that hurts people during a bear market is the "need" to invest capital at all times. There is nothing wrong with holding your account in cash. Cash is king and if you do not have any other grand strategic plans for a bear market, one of the safest things you can do is go to all cash. The rise of the dollar value as of late, holding your account in cash is as good of investment as any. Since the end of QE in 2014, the dollar has increased about 25% and that's hard to beat with the S&P even during the good years!

Make Money Falling Down

One of the best ways to survive a bear market is to trade it. Sure, we all love playing water sports in the summer, but when winter comes, most of us have no problem exchanging our water skis for snow skis. So why would traders not want to change tactics during a bear market?

There are several ways you can play a bear market, but one of the most lucrative and cost-effective is to buy put options. You can buy puts with a few days to expiration or a few months to expiration and everything in between. But the key here is to understand the option and position yourself for the next wave of bearish selling pressure. Some great fortunes have been made in the middle of bear markets, and there's no reason you should "switch sports" and learn to trade a bear market for profit.

Sell Covered Calls

Another popular play during bear markets is to sell Covered Calls. Covered Calls are an option strategy that sells someone else the right to buy your stock as it's falling in price. The benefit here is you can use these calls to lower your cost basis during the fall and still retain ownership of your stock. Covered Calls are a very effective tool to use during bear markets especially if you have large stock positions that are optionable.

Reallocate Your Risk

Reallocating your risk is one of the most important things you can do during any market. Studies have shown that 30% or more of Americans in their 60s have 80% or more of their 401k and retirement funds in equities! This imbalance is part of the reason bear markets can be so devastating. If you are exposed 80% or more to equities either through direct investments, Mutual funds, ETFs, whatever - you need to take some time to consider where your money is allocated. Also, purchasing two or three rental properties can be an ideal offset to a bear market as they provide good cash flow and diversification.

​Expect the Unexpected

Maybe the most important adjustment to make during a bear market is being mentally prepared for the unexpected. Every spring and summer storms roll through our area of the country. If we are going to the lake to ski, we check the weather to see if it might rain. A little rain won't hurt, and if you are prepared for it you can even stay dry and even have a little fun at the same time.

The stock market is the same way. Bear markets don't have to hurt as they are not inherently bad. Like rain, they are part of the cycle of economics and to think they will never come would be naive. However, if we can anticipate when they are coming, then we will avoid being surprised when they do.

So, here's one more thing to anticipate - bear markets are also known for volatility. When the market sells off eight hundred points and then rallies to close only down two hundred points like the market recently did. Don't panic as this is a typical symptom of bear markets. Sometimes those volatile days are the signal we need to tell us that a short-term rally is about to begin!

Just like most people prefer summer over winter, most people prefer bull markets to bear markets. But just because markets are sliding, does not mean you have to become a victim and lose all your money. If you put in play these six tips, you may find an economic winter isn't quite as bad as you thought, and you might even find you can successfully navigate it.

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