How To Prepare For The Next Bear Market
Sooner or later, the good times have to end. Sooner or later, you will have to prepare for the next bear market.
That’s the nature of markets – upswings will always be followed by downswings, bulls by bears. The sign of a smart investor is their ability to ride out these waves.
There hasn’t technically been a bear market in over nine years, though the 2011 downturn came nail-bitingly close.*
Even if we only count from 2011, we’ve had a long stretch without such a downturn, and it can’t be long before that changes.
Bear markets are an unavoidable feature of the financial system, but that doesn’t mean that you have to sit back and accept the pain. If you prepare for the next bear market, you can increase your chances of long-term profit.
Set Goals
Most of the work you’ll need to do will come before the bear market arrives. Start by clearly identifying your goals in both the short and the long term.
For younger investors, this might be about achieving the greatest possible growth, a goal that encourages high risk, high reward investments.
As an older investor, you might be more concerned with protecting the wealth you’ve already earned.
Know how much money you need for short-term purposes. This is money you can’t afford to lose, as you need it handy.
Based on those goals, you can start planning how to invest to prepare for the next bear market.
If you have money that you won’t need over the next few years then you can put it into investments that might be vulnerable in a bear market, safe in the knowledge that they’ll emerge on the other side.
Alternatively, you could save it to buy up securities that lose value during the downturn, with the aim of profiting from their return to their true value.
Goals will also determine how active you need to be in following and responding to a bear market.
If you’re focused on short-term profits, then you’ll need to pay close attention and make regular adjustments.
If you’re more focused on the long term, then you can sit back and ride out the storm.
Know Your Risk Tolerance
Now decide what level of risk you’re willing to take, in order to prepare for the next bear market. This depends upon the goals you’ve set, your circumstances, and your personality.
If your goals are based on stability that you can’t take as many risks. If you’re focused on profits, then you’ll have to take them to get higher returns.
The more financially secure you are and the fewer people are depending upon you, the more risks you can afford to take with your money.
If you don’t have a lot of wealth, then a few bad investments could be ruinous. If you have a large family counting on you, then risks will affect them as well as you.
The more money and the fewer dependents you have, the more chances you can take. Of course, this also depends upon how well you deal with stress.
If you enjoy the thrill of uncertainty, then you can follow more of a high-risk high-reward path. If stress causes you migraines, then play it safe.
Having worked out your risk tolerance, build a strategy around it.
If you’ve got a high level of risk tolerance then you can hang onto riskier investments until the moment the market turns, with the hope of getting out at the right moment and reinvesting when prices are low.
If your risk tolerance is low, then you’re better off shifting to lower-risk lower-yield assets now, because the bear can’t be far off.
Diversify
Regardless of how you prepare for the next bear market, diversification should be part of your strategy. Invest in a spread of assets so that whatever’s hit hardest, it doesn’t ruin you.
Select a spread of non-stock assets, as these are more likely to do well in a downturn.
Buy some high-quality bonds as a safety net. During fifteen bear markets and close calls since 1945, five-year US Treasury bonds have only fallen in value once.
Every other time, they’ve risen in value even as stocks were plummeting.
Keep Your Head
Once the bear market comes, it’s easy to get into a panic.
Because your wealth depends upon the markets, you’ll naturally want to follow the financial news.
Stories of disaster make it tempting to make rash decisions, selling up at the wrong moment or pulling all your money out of the markets at a loss.
But the news is focused on the short-term whereas successful investment is a long-term game. Unless your strategy is specifically built around short-term investments and buying during the dip, resist the urge to keep reading every scrap of news.
Focus on your goals and strategy instead. Remember, you made those with a clear head.
Stay calm. Don’t let yourself get panicked. Accept that some of your investments will lose value in the short term but know that things will turn around.
By the end of a bear run, the market always regains its value, and if you’ve chosen wisely then your investments will too.
The bear doesn’t last forever. The bull will return.
* The technical definition of a bear market is that there’s a 20% decline. The 2011 downturn saw a 19.4%, so close to that arbitrary technical definition that it might as well be counted.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
