Bearish markets tend to test your patience and may hamper your plans of long term investing. When the markets start heading southwards for a prolonged time, by ~20%, they are said to be bearish.
This is when investors and traders start getting tensed and wonder about whether they should stay put or sell their investment. While we want good returns, our aim should be to protect our capital. Here are a few strategies that can help you to safeguard your portfolio in a bearish market:
- Diversification: Investing in different sectors, stocks, or asset classes can help you to minimize risk, when done correctly. A portion might not do well during a bearish market, but that can be nullified by another investment that did well, as opposed to having a concentrated portfolio.
- Do not set stop losses: You might disagree, but stop losses can make temporary losses permanent. If you are confident about the fundamentals of the company that you have invested in, hold on till the market rebounds, especially if you are a long-term investor. In any other case setting a hard stop loss or a trailing stop loss will help to protect your capital.
- Prepare in advance: Stocks give massive returns, but they come with massive risks. Invest in other asset classes as well, which might give moderate returns, but come with lesser risks. Ex: Bonds, fixed deposits, gold and so on. These investments are less correlated with the stock markets.
- Re-allocate: If you sense that a bear market is approaching, sell some of your investments, book profits and become cash-rich. When the market is bearish, use this money to buy more stocks at lower prices so that you reap benefits when the markets rebound. In fact, invest in those stocks that pay dividends.
- Defensive Strategy: Invest some money in large-cap stocks or bluechip stocks as they are less affected by a downturn in the markets. Even if they are, and you stay put, you’re more likely to save your capital and make profits in the long run.
