6 Ways to Survive this Bear Market

Are you worried you can't survive this bear market? The U.S. stock market in 2016 came off to the worst January performance since... well ever. 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.

And it was not just the U.S. stock market, Europe, Japan, China, and Crude oil performed much worst when 2016 began.

So when a bear market hits, how do we survive?

Here are 6 tips I've compiled to help you survive, and maybe even thrive during this bear market! 

1) Be content with Cash

One of the things that really hurts people during a bear market is the feeling of a "need" to be invested 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 simply go to all cash. In fact given the rise of the dollar value as of late, holding your account in cash is actually as good of investment as any. Since the end of QE in 2014, the dollar has increased about 25% - that's hard to beat with the S&P even during the good years!

 

2) Buy insurance

Another popular way to survive market downturns is to simply buy insurance. Using Put options, a trader can very effectively hedge their positions. As the market goes down, the puts go up and work just like an insurance policy. Sure, like any insurance policy you will have to pay a premium (the option premium), but the protection can be priceless, particularly if we have a massive bear market like we did in 2008 (I know you don't think it will happen but you probably didn't think it would happen in 2008 either!)

 

3) Get rich falling down

The best way to survive a bear market is to trade it and trade it for a profit! 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 simply 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 just "switch sports" and learn to trade a bear market for profit. 

 

4) 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 down. 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 and if you have large stock positions that are optionable, and you want to keep the stock, selling covered calls can be a very good strategy for bear markets.

 

5) Reallocate your risk

Personally I think 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 really need to take some time to reconsider where your money is allocated. Buying 2-3 rental properties that provide cash flow and diversification can be an ideal offset to a bear market.

 

6) Expect the unexpected

Maybe the most important adjustment to make during a bear market is to simply be mentally prepared for the unexpected. I have been asked several times over the past 2 weeks if I'm worried about the market. Every time my response has been "why"? Why should I worry about something we anticipated?

Every spring and summer storms roll through our area of the country. If we are going to the lake to ski, I check the weather. That way we have a good idea if it may rain and we are not surprised. A little rain won't hurt, and if you are prepared for it you can even stay dry and maybe even have a little fun!

The stock market is the same way. Bear markets don't have to hurt (gasp, awe, puke, what?! did he just say that?) Yes I just said that. Bear markets don't have to hurt. 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 that they are coming, when they do show up we won't be surprised.

So here's one more thing to anticipate - bear markets are also known for volatility. So when the market sells off 800 points and then rallies to close only down 200 points like we did on Wednesday, don't freak out. This is a typical symptom of bear markets. Sometimes those really volatile days are actually 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 it does not mean you have to become a victim and lose all your money. If you remember these 6 things above you may just find an economic winter isn't quite as bad as you thought, you might even find you like it!


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