If you're reading this report right now, chances are that you've grown concerned about the market being due for a correction... or maybe even a full-on crash.
Like many other investors out there, the possibility of stocks rapidly falling might keep you up at night. And that's only natural...
But writing off the market altogether in times of trouble might be the worst mistake you can make as an investor. There are always vehicles and strategies out there that work — whether stocks are going up, down, or even sideways. And often, the biggest profits come at the end of a bull market.
So, how should you invest to prepare for a bear market when everyone seems to be losing money? And when a recession hits, what are the best steps you can take to grow and protect your wealth, even while things are still tough?
Well, the truth is that everyone's financial situation is different. So, the answer to that question will depend on a variety of factors that include your age, income, expenses, etc. We can't tell you everything you'll need to know right here. But there are a few things that every person should be doing when a full-on crash begins to seem inevitable, even if it never happens.
So, to help keep you prepared, we've put together five simple and concise rules for investing in a bear market. These are steps that every investor should follow when the market seems to be screaming: "Sell, sell, sell!"
Bear Market Rule No. 1: CREAM
You probably don't want to be asking too many rap groups out there for financial advice. But as the great Wu-Tang Clan once said: "Cash rules everything around me. CREAM, get the money. Dolla', dolla' bill, y'all."
Jesting aside, cash is king during a bear market. First, because you want to limit your exposure to stocks. And second, because you'll want plenty of capital on hand whenever the market dips.
The second reason is probably the most important reason for keeping a stockpile of cash on hand when the market starts looking shaky.
Don't sell out of your positions entirely. But don't be afraid to take some profits off the table and save them for later.
And that brings us to rule number two...
Bear Market Rule No. 2: Stay Bold
It's important to keep your emotions in check and not act too skittish whenever stocks sell off. Fear is your greatest enemy in a bear market — just as greed can be your fiercest foe when the bull is raging.
Keep in mind why you invest in the first place.
If you're trying to make a quick buck, chances are you're doing it wrong. That's trading. It's not investing. It's really more like gambling.
But if you're looking at the five-, 10-, or 20-year picture, you know good and well that stocks go up over time and that it would be a mistake to try and time it.
One of our most successful investment newsletters, The Wealth Advisory, was founded in the throes of the Great Recession. And yet, its members are looking at an overall portfolio gain of well over 700%.
A crash in the market means one thing to a true investor: a sale.
If you were buying when stocks were higher, all you'll need to ask yourself is what's fundamentally changed about the companies in your portfolio?
If the only answer you can find is "the stock went down," there's no reason not to buy more of that particular stock.
After all, you happily paid top dollar for the same exact thing 12 months ago...
Bear Market Rule No. 3: Don't Be a Midas
I know that plenty of you will end up disagreeing with me here. But if you fancy yourself a gold bug, my advice is that it's probably time to let go of old habits.
Once a reliable hedge against equities, gold has, to a large extent, lost its status as the go-to safe haven for investors when stocks start to crash.
As you can see in the chart below, the correlation of gold (in black) and gold miners (in blue) to the S&P isn't what it used to be. In fact, the correlation between gold and equities has become generally positive since 2015:
Conventional wisdom says gold should be rallying as stocks fall, but the exact opposite has proven true over the last several years. For instance, when the S&P dropped by 7% in early 2015, the losses for investors who'd sought safety in gold was at least twice as great. And in some cases, those losses were multiplied by a factor of five.
Now, to be clear: This isn't to say you shouldn't allocate any of your portfolio to gold or gold miners. But if you're relying on these vehicles as a hedge against equities, you won't wind up too happy.
If you really want to hedge, you'll have to follow rule number four...
Bear Market Rule No. 4: Hedge Like a Pro
The best way to lower your risk in the face of falling stock prices is by hedging your positions directly. But I don't just mean buying an exchange-traded fund (ETF) that tracks the inverse of the S&P 500. I'm talking about using options contracts for their intended purpose.
As intimidating as they might be at first, options are relatively simple investment vehicles that everyone should take advantage of. Simply put, owners of an options contract have purchased the right — but not the obligation — to buy (calls) or sell (puts) shares of a specific stock at a specific price for a set period of time.
You can hedge your stock positions by using options in one of two ways: buying puts or selling calls.
If you buy a put contract, you've purchased the right to sell a set number of shares at a specific price.
Say, for instance, you own 100 shares of Apple (NASDAQ: AAPL) purchased at $100 apiece. By additionally purchasing a block of 100 put contracts at a $90 strike price, you're capping your losses at 10% per share for the entire duration of the contract, minus the cost of the contract, because you can sell your existing shares for $90, even if the stock is trading at $50.
Your second method of hedging using options is to sell a call contract. By doing so, you're giving someone else the right to buy a specific number of shares from you at a specific price. But in exchange, they'll pay you immediate income.
Sticking with the prior example, let's say you own 100 shares of Apple purchased at $100 each. You can hedge this position by selling a block of 100 call options at a $120 strike price. Although this will cap your upside at 20%, in a bear market, those contracts will likely expire worthless anyway. This way, if your stocks were to fall in price, you'd still get paid in the process.
If you're interested in learning more about the power of using stock options to boost profits and protect savings, our options expert's, Briton Ryle's, Real Income Trader could be just the thing.
Bear Market Rule No. 5: Stop Chart Watching
One of the worst habits you can develop as an investor is checking your trading account and watching stock charts on a daily basis.
Even though it's important to stay up to date on everything going on with the companies you own, frantically checking your balance will only serve to cloud your judgment and give you ulcers.
As much as we all want to log in and see our bottom lines on the rise every day, the reality is that a watched pot never boils. And time tends to move slowest when your eyes are on the clock...
In a bear market, obsessing over your balance is particularly grueling. It's the kind of behavior that drives us to sell when we shouldn't. And that's because after we've seen enough red, your brain starts to think that the bleeding will never stop.
Sometimes, the best thing to do is take a breath, step outside, and enjoy the day. Know that the storm will pass, and when it does, there will be plenty of blue-sky and profitable opportunities ahead.
And trust the experts here at Wealth Daily to help you navigate even the roughest financial waters.
Before we part, I'd like to extend a sincere thank-you for joining us here at Wealth Daily. We look forward to providing you with valuable investment research and commentary over the course of your subscription. Our core philosophy is that the more you know, the better you'll be able to take advantage of that knowledge to expand your wealth. We'll continue to share our insights on how you can boost your portfolio with flexible and safe investments.