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How Will you Prepare for the Next Bear Market?

I wanted to revisit the question Ben Carlson answered in a recent post of his.  But I wanted to open the floor to readers.  The question:

How are you preparing for the next bear market?

We all know it’s coming eventually.  And no one really knows when.  And while we know that bear markets only occur about 20% of the time we also know that they can be extremely devastating events as they can set us back by years in trying to achieve our financial goals.  It’s times like these when you really should be preparing a plan because stability inevitably leads to instability.  At a time when everyone is getting more bullish you should be thinking about how to benefit when the bear market really comes.

So, how are you prepared for this inevitable event?  Are you just mentally preparing?  Diversify, hold and hope?  Are you more active?  Are you more likely to move into “actively” managed funds given the uniqueness of this environment? Are you just putting together a “passive” portfolio assuming that the future will look something like the past?  Let me know what you think….

6 comments
  1. Avatar
    RJ

    I’ve “banked” all of my equity fund profits from the last 5 years of recovery and have moved 100% into a government securities fund. I did this about a year ago. Sure….. I’m only going to make approximately 2% on my investment but that’s OK with me. When we get the next 20% – 25% selloff in the equities markets, I will re-evaluate my position. I retired in 2011 at the age of 55 and I don’t want to go through another episode like we had from October 2007 through March 2009. I rode that horse. Not going to do it again.

  2. Avatar
    Frederick

    Isn’t diversification the only viable approach? I disagree with your comments on commodities and I think that now might be a good time to diversify with commodity funds. Total bond funds don’t really get you the diversification you need from a bear market so I am overweighting government bonds.

  3. Avatar
    Matthew

    Cullen:
    It’s all about communicating effectively and setting proper expectations with your clients. Explain that there will be a time in the future (could be next month, next year, 5 years from now etc.) that we will be sitting across the table and I’ll have to communicate that their portfolio is down 15% on the year. It’s all about having a proactive plan in place and explaining that it’s investor behavior which decimates portfolios, not the market itself. Those are the times when you are most valuable as an advisor.

  4. Avatar
    Geoff

    1. Put options

    With S&P 500 index put options, for example, you can protect most of your US equity portfolio without giving up the upside. All it will cost you is the price of the puts, which are relatively cheap at the moment given the low volatility.

    2. Stops

    Sell if the market declines by more than a certain percent. Sure you’ll get whipsawed occasionally (been there and done that) but you will most certainly avoid a big drop.

    3. Blue chips

    Quality dividend stocks will always be in high demand and will likely keep their value better than many alternatives.

    4. Bonds

    Bond yields are low but they will likely go lower in any type of flight to safety situation, be it a recession, European breakup, escalation of Ukraine war etc.

  5. Avatar
    tealeaves

    Personally I’m still struggling if we are
    1. In cyclical bull cycle of a secular bear market which could severely damage the portfolio (sideways chop)
    2. In a secular bull market which tend to have less severe corrections (higher highs)
    3. Secular confused market and maybe it doesn’t matter and just confuses the issue

    If we can answer 1 or 2 that would heavily influence how aggressive we would need to protect our portfolio. That is the biggest question to answer in my view. I would love it if at some point you post a similar open comment topic.

    In general, my portfolio is small enough that I can sell my equities and purchase treasuries. And will do so partially when the business cycle appears to falter. And then completely when we equities drop under fabers 10 month moving average close. If we are in a secular bear market, then I would add to my gold position as it is contra-cyclical.

  6. Avatar
    MarkShearer

    I don’t time the market and I won’t sell out of panic. Everything I own pays me income which I re-invest as much as possible. When the market pulls back, I will keep buying more income-generating securities, particularly dividend-growth common stocks that will participate in the rebound. In the meantime, I mostly buy preferred shares in retirement accounts and municipal bond funds elsewhere.

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