Bear Market Strategies – Are You Ready?

The Federal Reserve and federal government have showered massive liquidity on the economy and markets to combat the pandemic. Their medicine worked. Economic activity rebounded quickly. Stocks and other assets soared in price, and in many cases, valuations now mirror those in 1999 and 1929.

Fiscal spending is normalizing quickly, and the Fed is warning investors it is ready to remove the stimulus. Such a reversal of monetary and fiscal liquidity does not guarantee a reversal of asset prices, but the odds of a bear market are increasing.

It's time to think about bear market strategies.

Bear versus bull market strategies

Investors spend most of their time playing offense in bull markets. In other words, they select the best asset classes, assets, sectors, and securities they think will outperform the broader markets. In a bullish trend, the punishment for being wrong is often positive returns, albeit not as good as the market.

Bear markets are infrequent but devastating to your wealth unless you employ defensive strategies. Some investors fail to react to bear markets, and it takes years to recoup losses. Others panic when markets have already given up substantial gains and lock in losses.

I prefer to play defense in bear markets and protect wealth. Not only does such an approach limit losses, but it leaves us with cash when stock valuations are more reasonable.

Given the coming change in the monetary regime and extreme valuations, it is best to remind ourselves of bear market trading patterns and consider strategies to retain our wealth in case the bear wakes from hibernation.