- 1 How Bearish Market Changed How We Think About Stock Market
- 1.1 #Avoid Market Timing
- 1.2 #Continue Systematic Investment Plan
- 1.3 #Invest in Debt
- 1.4 #Reduce Exposure to Mid Cap & Small Cap
- 1.5 #Invest Across Investment Categories
- 1.6 #Diversify Internationally
- 1.7 #Never Fight Back
- 1.8 #Take Defensive Stocks
- 1.9 #Hedging with Puts
- 1.10 #Cash
- 1.11 #Covered Calls
- 1.12 #Wrapping Up
How Bearish Market Changed How We Think About Stock Market
You’ve made fantastic money on your current Investments; valuations are at the peak and growth hacking company talks about does not let you think about the bearish market. But after some time passes, no matter how big fan you are of stock market things starts to wane.
The overall aim of your stock market returns is consistent returns over a period, while the stock market is giving you an exceptional return educating yourself what you need to know otherwise.
And how you insulate yourself from the bearish stock market and ensure that you take the maximum out of the stock market potential. Let’s not the change in market situation let you change the perspective of the stock market returns.
Does Bearish Market Stress You out?
Even though for a shorter period bear market does exist. If bearish stock market stresses you out, then it’s time you take note of corrections required in your stock market. The stock market is going to be the same to everyone what makes the difference is how you act on your investments.
In what way are you your own worst enemy?
What if I tell you there are straightforward ways, yet very effective ways to get best out of your market potential. What is more important is that you have already taken the first step in insulating yourself. I’d always wish that you read this blog post right before the beginning of the bearish market. Like every good thing comes with a curse so does a bullish stock market.
Today’s post shares a simple, easy ways to deal with the bearish market.
#Avoid Market Timing
Timing is everything. Buy low and Sell High.
You must have heard this all the time. Have you heard an all-time high of a stock became all-time low after few years? I have many times.
One can advise timing the market only after seeing a huge run-up in the stock.
Market timing should be otherwise seen as how long are you going to be invested. Are you ready to be invested in bullish and bearish markets? Are you willing to stay put during a bearish market?
Timing work only for Intraday Traders. Majority of Intraday Traders and unsuccessful.
#Continue Systematic Investment Plan
People avoid stock market when a discount is going on.
The bearish market is an opportunity to get stock cheaper. If you are investing in stock via mutual fund route, continue with your SIP and never assume reduce in your stock market valuations as a loss. Most people confuse this with value averaging.
Value averaging is completely different. While investing in Mutual Fund during the bear market, you are having confidence in the stock exchange. And you are doing what you were supposed to do. The best way to invest in SIP is Auto Mode.
#Invest in Debt
If the debt is not part of your portfolio, then the right time to start investing in debt is correct before the commencement of the bear market.
With the advent of technology, the options in debt are myriad the debt could be an excellent source of your passive income. Debt options could range from Corporate Bonds, Liquidbees(Tax-Free), Debt Mutual Funds, Peer-to-peer Lending, etc.
The best way to toggle your money is between the stock market and debt. The combination of two will manage risk and return aptly. The stock market would lead the return part of the money, and debt would handle the risk part of the money.
#Reduce Exposure to Mid Cap & Small Cap
Small-cap and Mid-cap stocks are highly volatile. Usually, small cap and mid cap are the stock to get hit hard and fall the highest. Reduce your exposure in small and mid-cap the moment you sense the bearish trend.
Same applies for small-cap and mid-cap index funds and mutual funds. They are just the opposite of defensive stock cannot be relied upon during a bearish market.
Mid-cap and small-cap funds fall under the category of high-risk, high return.
#Invest Across Investment Categories
Test of time for the stock market is during the bearish trend. One should always stay diversified in asset class also to stay protected for the bearish market.
Some of the alternative asset class during the bearish market are gold, commodities, debt, real estate, options trading, bonds, government securities, ETF, etc.
If you entirely depend upon the stock exchange cost of hedging would be extremely high and at times would affect your indemnification process.
With Globalization the opportunities abroad are immense. You are protected from Political Risk, War Risk, Natural Disaster Risk which would affect only the country and not globally.
The best example for this would be 10 Years of Depression in the American Stock. An entire decade was spent with negligible returns across the asset class. This is a rare situation.
Individual bearish trends are only for certain economies or countries the right way to get protected from them is to diversify globally.
#Never Fight Back
The stock market is always right. Never fight back with the stock market or get into revenge mode for the lost money. At the end of the day with this attitude, you are going to harm yourself.
One of the most important attributes in Life does not work in the stock market. This approach will only lead to a backlash. The bullish Stock market does not give you as much as opportunities as Bearish Stock Market.
The stock market is a discounter of all known information.
#Take Defensive Stocks
Any stock that provides steady earnings and stable dividends irrespective of stock market conditions. It should not be confused with defense stocks. They are also non-cyclical stocks in nature. Mathematically also they are defined as defensive stock because they have a stock beta below 1.
Stocks that are stable at the times of economic adversity. Since they are less vulnerable to economic downturns, they protect your money and give your returns and dividends.
Investing in these stocks should be one of the options. This protects your portfolio.
#Hedging with Puts
Put options are otherwise known as Cheap Insurance.
Bearish Stock Market would be the right time to start buying cheap OTM put Options. If your portfolio is extensive and spread across the sector. It would take a lot of time to restructure.
To Immediately mitigate the risk one should buy OTM Put options and if someone is not comfortable in paying the put premium then go short with stock futures(not recommended) because in case of a market correction or wrong triggers one could end up losing money in the process.
Converting Bad Investments or Loss Making Investments to cash could be an excellent option. Most people refrain from keeping idle cash saying it is wrong. Cash at the bearish times is one of the most vital things.
At peak valuations, most of the investable surplus is very often kept idle cash or cash equivalents. At the time of adversity, there is no alternative to cash.
Cash combined with courage in a time of crisis is priceless.
One of the ways to generate passive cash flow is an excellent opportunity. It not only protects your investments but also makes money during the time of non-performance.
The covered call can be done stock-wise also if that doesn’t seem to be a valid option then based on the consolidated stock holding beta value index can be done.
It might limit your upside in the stock market but generates potential returns in the downside. Simple Option Mentoring could help you get this skill.
You want to become a better Investor, I am not asking you to take any bold or big changes.
Just do one Thing.
Take one step.
Maybe this would be the most important step to be prepared for bearish stock market. Improvising on your current holding, or maybe it’s something else. By taking this one important step you would be prepared for the worse and grab the opportunity like no other person.
You’ll be a better Investor tomorrow than you are today.
Let me know if you have something to say in Comments.
Also published on Medium.