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A bear market is a situation in the financial markets where they experience prolonged price declines. These extended periods often lead to massive losses and high risks to risk-averse investors.
An excellent example of a prolonged bear market was the 2007-2009 United States market crash leading some assets to losses of over 50% in value. Since these crashes often lead to investors’ losses in the short run, what can you do to protect the money? Or exit the market altogether?
This guide discusses five ways an investor can survive in a bear market and make profits under harsh market conditions.
Avoid Panic Based Reactions
It’s quite common for investors to react fast based on their emotions and sell their investment assets in bear market periods. Unfortunately, responding fast can have dire risks in the short and long term, including the risk of permanently losing capital.
Some market crashes may cause serious problems today, but the market returns to normalcy in just a few weeks. Therefore fast reaction exposes your investments to risks that may have a permanent effect.
Diversify your Portfolio
Every wise investor knows how important it is to diversify the investment portfolio. However, investing in only one type of asset or stock from just one company is risky. Additionally, there are increasing cases of volatility, which cause drastic plunges in some companies’ stocks.
Instead of focusing your assets on some short-term investment options, you can invest in long-term assets. Like treasury bonds, some assets take probably ten years or more to mature and come with good profits.
Diversifying doesn’t stop the markets from dropping; instead, it equips investors with a world of assets to profit from in case one investment fails. In addition, the fast recovery holdings will help cushion the losses suffered in other failed assets.
A wise investor will continue investing but might need assistance from an expert advisor on the best way to diversify.
Regularly Rebalance your Portfolio
Portfolio rebalancing is an investment strategy where the investor restructures the values of each investment based on risk and profitability. For instance, investors may restructure their portfolios after noticing that their equities take too much of the portfolio but bring little to no returns.
Investors decide to increase the value invested in the better-performing assets in the long run and reduce the value invested in nonprofitable assets. Therefore, research before rebalancing is crucial since you get to know the best-performing assets and invest in them.
Regular rebalancing of the portfolio helps you determine the best assets to invest in at a particular time, and invest in it. For example, the right portfolio balance will be important in bear market times, ultimately helping you survive and profit.
Keep A Positive Attitude About the Future
Market crashes, financial crises, and stock price plunges are regular in the financial world. However, there will always be huge chances that there will be bouncebacks of future asset prices. For instance, in the 2009 financial crisis, many stocks and other investment assets suffered serious plummets leaving investors in fear.
However, those risk-ready investors at this time took advantage and purchased the stocks when the prices were limited, probably at their lowest point. A few months later, in 2010, the stock prices started to rise, and investors have been making good fortunes from those assets since then.
Keeping a positive attitude even in a time of crisis will drive you to invest in losing stocks, with the hope of them rebounding. Furthermore, avoid fighting back and making sudden moves that may lead you to losses.
Leveraging the 401k Strategy
The 401k is a strategy instituted in the US, where employers offer tax benefits to their employees. Workers contribute a slime of their income towards the 401k accounts, and the employers match the value. The 401k involves the contribution of small amounts at regular intervals.
Similarly, investors should avoid investing vast amounts at a single time. Instead, they should invest in small quantities at regular intervals and sometimes in different assets. For example, investors in the 2008-2009 market crash benefited greatly from leveraging the 401k rule.
Surviving in a bear market is not easy, especially for investors who are not ready for risks. In such conditions, some investors choose to liquidate their position selling all their assets at lower prices, thus ending up making losses.
There are, however, many strategies that you can use to ensure they survive in such markets. As an investor, you should avoid acting based on human emotions; instead, you should keep a positive attitude and hope that the market will bounce back.
Moreso, continually investing at regular intervals will increase the chances of survival in these harsh markets. You find different investment assets to maximize your income in the short and long run.
Investing in assets like treasury bonds will be specifically suitable for long-term investors, guaranteeing good returns in the long run. On the other hand, risk-averse investors are recommended to invest in short-term and highly profitable investments.