Common Bear Market Investing Strategies: How to Preserve Wealth During Downturns

by Susan Paige on July 31, 2019 · 0 comments

Much as we’d like it to be so, equities markets don’t only move in one direction. What goes up, the saying goes, must also come down.

When those downturns happen is anyone’s guess. It’s often said that the stock market has correctly predicted nine of the last five recessions; market corrections don’t always presage macroeconomic woes.

Then again, some do. According to Investopedia, “bear markets” occur when “ securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.” Traditionally, these definitions must occur over an extended timeframe — “typically two months or more,” according to Investopedia.

Bear Markets: Is There Anything to Be Done?

When a bear market finally arrives, can rank-and-file investors really do anything to protect themselves? Or is waiting out the downturn the only surefire solution?

According to San Francisco-based financial advisor Daniella Rand, a wealth management professional with two decades of experience in the industry, retail investors can absolutely take steps to protect their investments during a bear market. These steps aren’t foolproof; even investors who’ve managed to consistently achieve above-market returns may see their portfolios lose value during a prolonged bear market. 

Still, they’re better than the most common alternatives: doing nothing and hoping for the best, or liquidating an entire portfolio overnight and stuffing the proceeds under the proverbial mattress. Neither strategy is optimized for portfolio protection.

Find a Full-Service Wealth Manager With Extensive Bear Market Experience

If you’re not prepared to shepherd your investments through a bear market without an experienced hand at the tiller, this is as good a time as any to find a full-service wealth manager whose career predates the most recent cyclical bear market. During a prolonged market downturn, you’ll want to have such an ally on your side.

Consider Increasing Your Exposure to Inverse ETFs and Funds

Inverse ETFs are specialized instruments designed to perform precisely at odds with a benchmark index or basket of securities. When the value of an inverse ETF’s benchmark falls, the value of that inverse ETF should (in theory) rise commensurately. Whether this always happens in practice is another story. And bear in mind that inverse ETFs can be quite risky; if the market breaks the other way, you could lose a significant share of your investment. 

Continue Dollar-Cost Averaging (Especially in Your 401(k))

“Buying on the way down” isn’t a surefire short-term strategy, because calling the bottom is a fool’s errand. Given a suitably long time horizon, however, this play makes more sense. It’s especially effective for younger investors already making regular contributions to tax-advantaged retirement accounts, such as 401(k)s. Maintaining or even increasing these contributions, and perhaps capturing an employer match in the process, will help reduce your investments’ cost basis and boost upside when the market recovers — without incurring capital gains tax.

Maximize Tax-Advantaged Account Contributions

In the same vein: If you’re not already doing so, and your cash flow allows, consider increasing your tax-advantaged account contributions until you’re contributing the maximum allowable under current tax law. Most Americans are eligible to contribute to an employer-sponsored qualified plan and at least one individual retirement account (IRA) on a tax-advantaged basis; check with the IRS for current-year maximums.

Increase Exposure to “Defensive” Equities

In a typical bear market, certain classes of equities perform better than others. Non-cyclical and counter-cyclical equities (and funds comprised of such equities) tend to hold their value better than cyclical stocks, for instance; utilities and consumer staples are generally regarded as “defensive” plays, and many pay dividends to boot. Speak with a licensed financial advisor to discuss options that make sense for your personal financial goals and risk tolerance.

Increase Exposure to Instruments With Low Risk of Principal Loss

Consider increasing your exposure to instruments that present low risk of principal loss, such as CDs and Treasury bonds. These instruments typically offer low rates of return, but that’s a tradeoff you may be willing to make to preserve your portfolio’s value. 

What’s Your Bear Market Strategy?

Every investor is different. While fiduciary wealth management professionals like Rand may advise individual clients to pursue specific portfolio protection strategies during market downturns, they’re simply not in a position to give generalized bear market advice. Too many variables are at play, and too much is at stake, for advisors to casually dispense advice that may or may not be in a particular investor’s best interest.

If you’re truly in need of advice ahead of the inevitable bear market to come, you’ll want to find your own wealth management professional — someone whose experience and expertise is sufficient to convince you that they’ll act in your best interests and execute when it matters most.

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