Volatile stock markets combined with rising interest rates are often seen as intimidating situations that thwart investors from cashing in during bear markets. Investing in bear markets is contentious not only because of the nature of the market drop and lingering uncertainty about where the stocks might find level, but also because many investors may be prone to extreme caution and hesitate to re-enter the market.
While it is true that a drop in stocks, equities, indexes, bonds, and other assets can create higher valuation margins for traders and improve the affordability of these assets, a cheaper asset purchase price does not necessarily translate into alpha returns.
As the advancing level and cycle of the major US stock indexes demonstrate, the downsides to investing in the bear market are considerable and that’s a risk that should never be ignored. Greed and fear are the predominant instincts that drive traders – and the risk of these instincts could be amplified manifold with a poor choice of investment in a bear market.
But does that mean that investors should give the opportunities of a bear market a complete miss?
Instead of wishful fantasies or expectations of magical windfalls, what is needed to succeed as an investor in a bear market is authentic guidance and a bold strategy based on a disciplined and factual study of the markets and assets.
As history bears out, the key to successful investing in a bear market lies in matching the right investment tools to each asset or instrument and using them to their full advantage to profit from market weakness.
In an enduring bear market, this ‘glass half-full’ approach to investment provides a significantly better alternative for investors than traditional methods. Investors must bear in mind that since the global financial crisis of 2008, the correlations between assets have only become more distorted, leading to higher risks and more complications in portfolio structures.
Indeed, valuations for almost all assets have become so distorted that they are now detached from their fundamental support. While the US bond market has dived more than 11 percent year to date in its worst year ever, global stocks have also hemorrhaged across markets, leaving the greenback as the only winner standing tall amid the mayhem. The bottom line: There is no immunity for any asset class anymore and even government bonds stand to lose.
That’s why being selective about the lucrative opportunities in the bear market is essential for investors, as is the constant pursuit of a well-diversified portfolio instead of simply following the market crowd.
One of the most successful methods is to focus on high quality stocks rather than the price, and deploying funds for both non-cyclical sectors and the ones that support growth. Additionally, traders and investors can benefit from derivatives contracts that rely on forward and options contracts tactics, allowing them to short stocks in a declining market. For investors, such contracts provide an investment exposure to the targeted assets without undertaking significantly higher risks and costs.
It is also important to remember that bear markets don’t last forever: Investors must understand that the gains of a bear market could be short-lived. The right tactics to adopt in such circumstances comprise a mix of technical investments, short-term maturity in derivatives contracts and having an easy-exit strategy ready.
While market volatility and the bear market are likely to persist for the near term, seasoned investors would do well with a strategic embrace of the opportunities on offer in such a market rather than waiting indefinitely for the cycle to change.