What to Do In A Bear Market

By Allen Landis

Many financial professionals now believe that we are headed for a major bear market. Part of the reason they believe this is because they believe that we are also headed for a major recession if we are not there already.

As investors, what should we be doing to protect ourselves during these extended downturns in the market? Let's look at a couple of strategies.

First, if you are an active investor and by active I mean that you regularly monitor your investments, set active stop loss points, and make buy/sell decisions on a fairly regular basis. If you fall into this category, the first thing you must do to protect your investments is to set proper stop loss points for every investment in your portfolio.

Typically, a 25% stop loss will protect your assets without causing a lot of excessive buying and selling due to minor market fluctuations. A key thing to remember is that stop loss points are fluid. That is, you should move them as your investments increase in value. This process locks in some of the paper profits and protects against major down moves. An important point to remember is that your stop loss should only be moved up as your investments increase in value. You should never adjust them down. This will only end up costing you money and defeats the whole purpose of the stop loss in the first place.

Many active investors look at the overall market and when the risk of being invested in the market becomes greater than the potential for profit, they move into cash and wait for the markets to settle down. After a major bear market, like we saw in the late 1960's and early 1970s, investors who were in cash were able to pick up investments at wholesale prices and made tremendous gains in the ensuing years as the market began to recover.

If you are not an active investor, then the best way to protect your investments during a bear market is by proper diversification. Proper diversification does not mean owning several stock mutual funds. It means investing in assets that have little or no correlation to the overall stock market. Investments like energy, precious metals, natural resources, or inverse funds all qualify as suitable investments for a properly diversified portfolio.

Remember, bear markets do not last forever. They eventually turn and become bull markets and when they do, investors who have preserved their investment capital will be in a position to profit handsomely.

Do you want to learn more about investing and protecting what you have? I have just completed my brand new guide, 'Five Things You Must Do Now To Protect Your Investments'

Download it free here: Five Things You Must Do Now To Protect Your Investments

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Published at Jan, 23 '08 ; read 248 times;

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