With the stock markets near all time highs and several thousand pounds of bombs being dropped over the last week, I feel it is fitting to talk about bear markets.
What is it?
A bear market occurs when the stock market has fallen 20% or more. A correction is when the stock market falls at least 10%. There are a handful of indicators/causes that could signal a bear markets coming. Stocks in the market are often overvalued – their perceived value is more than what their financials indicate. The cost of borrowing is high – interest rates are rising, so the cost of borrowing is currently going up. Another cause could come from outside the market – like in 2008 when the housing market triggered a major selloff and eventually the Global Financial Crisis.
Historically, a bear market occurs every 3.5 years, though it has been almost 8 years since our last one. With the stock market near an all time high, interest rates rising, and the bombs being dropped, or the threat of bombs being dropped, the likelihood of a bear market is pretty high. I am not saying there it is certain, nor am I predicting it, but mixing the statistics with the current happenings around the world cause me to lean towards some sort of down market in the nearish future.
What can you do?
During a down market, there are a handful of things you can do to ride out the downturn. First, if you are near or in retirement, you should be investing in fixed income/bonds. These investments not only produce fixed interest payments like clockwork, they are also a safe place to be in a bear market. There are different types of bonds, however, so be sure to stay away from high yield bonds or “junk bonds.” These bonds move a lot like stocks and are not necessarily issued by “stable” companies.
Another great asset is gold. Historically, gold moves inversely with the market. So if stocks slide, gold prices will increase.
You can also invest in large cap stocks. These are large, stable companies, and most of them pay dividends. During a bear market these stocks should not go down as much as other companies, and while the market is moving down, you could be collecting dividend checks.
A great way to be prepared for this period is to hold all of these assets in your portfolio at the same time. Your allocation will depend on your age, time horizon, risk tolerance, your investment objective, along with many others. Having your money in different investments could be a good way to spread your risk. Diversifying does not guarantee against loss or an increase in portfolio returns. The goal of diversifying is to reduce the overall risk in a portfolio.
A bear market is a decrease of 20% or more. There are many things that can cause one, including but not limited to overvaluation, rising interest rates, and global catastrophe. There are a number of investments that could help you reduce your risk and they should be allocated in your portfolio at all times. Portfolio allocation will vary by objective, risk, time horizon, among others.