Protect yourself against the next Bear Market - Use this Strategy

Bear Market Strategies

We have been in a Bull Market for the last 5 years now.  I am not going to attempt to call a top but when the markets go up for long periods of time, I’d be willing to bet there is a bear market somewhere around the corner.  This might be a few years off or it could start tomorrow. The key is to be ready. with a Bear Market Strategy. So, how do you protect yourself from a bear market no matter when it occurs?  We’ll it all depends on how you use bonds in your portfolio.

Traditionally, bonds have been used as a diversifier in portfolios.  That is, in addition to stocks, you should hold a mix of different types of bonds; short-term, long-term, junk bonds, government bonds, etc.  The problem is that some bonds can be just as risky as stocks and if we see another bear market like 2008, your bond portfolio is going to suffer right along with those stocks.

Instead consider using bonds as a tool to preserve your cash flows.  Calculate the amount cash you are going to need from your portfolio in the next 5, 10, or 15 years (depending on your risk tolerance). And invest this amount of your portfolio in only short-term,high-grade bonds.  These types of bonds are not as correlated to the overall stock market; meaning as stocks fluctuate these types of bonds will only go down slightly or could even go up as investors seek safer investments.

The argument against this strategy would be that you are giving up return by investing in these less risky bonds.  Well yes, you certainly are, but the bond portion of your portfolio is not used for this, it is used to preserve cash.  If you want to take risk do so in stocks.  And, in knowing that your cash (having predetermined how much you are going to need) is going to be there even during a bear market, you can comfortably invest the rest of your portfolio in stocks.  An average bear market takes anywhere from 2.8 to 5.2 years to recover so you can wait out any bear market by using this strategy

So, when the next bear market hits, you can ignore it knowing the money you need is safe.  You, in effect, become a “patient seller” and avoid selling your stocks at the bottom of a bear market.  As long as you prepare ahead of time and have a plan you will have the best chance of meeting all of your financial goals by using this strategy. 

Do you have any other Bear Market Investment Strategies?