Where do investors tend to put their money in a bear market?
If you are still working, a bear market can be an opportunity to buy more stocks at cheaper prices. The best way to invest during bear markets is to put small amounts in every month. You invest a fixed amount, say $1,000, in the stock market every month regardless of how bleak the headlines are. The strategy is called dollar-cost averaging.
Investing every month doesn't work all the time especially if the market is in a long-term uptrend, it is best to have every dime invested as long as possible. But in bear markets regular monthly investing works.
Also investing in stocks that have value and that also pay dividends. Since dividends account for a big part of stock market gains then the bear markets would be shorter and less painful if dividends were included.
It is important to have a financial advisor to “hold your hand” during market downturns. An advisor can help you by preventing you from selling out at the wrong time based on your fear or emotion.
Additionally, having a diversified portfolio in stocks, bonds, cash, and alternative investments is important in a bear market. Alternative investments are non correlated with the stock and bond market so over time having this type of asset allocation has proven to out perform the older more traditional stock, bond and cash portfolio asset allocation model.
Usually we put our money in consumer staples and the VIX. The consumer staples always seem to weather a bear market better than most while the VIX is great because it makes money as the market loses it.
If we look back at the history of bear markets in the United States, then they were usually preceded by lengthy, strong bull markets. Those bull markets encouraged most investors to pile into the stock market and into high-yield corporate bonds, with the highest concentrations close to the tops. We can see that recently with all-time record inflows into U.S. equity funds--especially passive equity funds including ETFs--in 2017. Thus, as each bear market begins, people have huge percentages of their money in the stock market.
The bear market always proceeds in a manner which discourages investors from selling anywhere near the top. The biggest losses and the gloomiest media coverage occurs only at the end, encouraging investors to sell in disappointment just before each bear-market bottom. The biggest monthly outflow in U.S. history occurred in February 2009, just before one of the strongest and longest bull markets in history.
In this way the fewest people benefit from both bull and bear markets.
A more intelligent approach is to have assets like U.S. Treasuries during a bear market for U.S. equities. Some short positions in the most popular funds are more aggressive and also will usually be profitable. In the first year of a bear market for U.S. equities, commodity producers and emerging markets often outperform as they have already been doing since January 20, 2016 and which will likely continue through some point in 2018.
A bearish market is traditionally defined as a period of negative returns in the broader market to the magnitude of between 15-20% or more. During this type of market, most stocks see their share prices fall, often substantially. There are several strategies that are used when investors believe that this market is about to occur or is occurring, which depend on an the investor's risk tolerance, investment time horizon and objectives. (For related reading, see Surviving Bear Country.)
One of the safest strategies, and the most extreme, is to sell all of your investments and either hold cash or invest the proceeds into much more stable financial instruments, such as short-term government bonds. By doing this, an investor can reduce his or her exposure to the stock market and minimize the effects of a bear market.
For investors looking to maintain positions in the stock market, a defensive strategy is usually taken. This type of strategy involves investing in larger companies with strong balance sheets and a long operational history, which are considered to be defensive stocks. The reason for this is that these larger more stable companies tend to be less affected by an overall downturn in the economy or stock market, making their share prices less susceptible to a larger fall. With strong financial positions, including a large cash position to meet ongoing operational expenses, these companies are more likely to survive downturns. These also include companies that service the needs of businesses and consumers, such as food businesses (people still eat even when the economy is in a downturn). On the other hand, it is the riskier companies, such as small growth companies, that are typically avoided because they are less likely to have the financial security that is required to survive downturns.
These are just two of the more common strategies and there is a wide range of other strategies tailored to a bear market. The most important thing is to understand that a bear market is a very difficult one for long investors because most stocks fall over the period, and most strategies can only limit the amount of downside exposure, not eliminate it.
Many retail investors will actually stay put because they have been told "you can't time the market." Many will finally say Uncle when they reach their pain threshold. Every bear market is slightly different. In 2008, the place to be was treasury bonds, gold, cash, and shorts using inverse exchange traded funds (ETFs) betting the market will go down.
But if you rely on some type of technical indicators, cash is the most conservative, simply covering up until the dust settles. Investment grade bonds and treasuries historically have been a safe haven. But with interest rates likely on the rise, it won't be so certain this time and the bubble may actually be in bonds. They are currently already off between -5% to -7% depending upon the bond sector. But using short selling ETFs are a simple, elegant way to either make money or simply hedge your long positions you don't want to sell. This can also be owned inside an IRA or retirement account whereas shorting individual stocks cannot. You also don't have to worry about margin interest or margin calls.
I personally will use a combination of cash, short term bonds, and short selling ETFs. I will also consider gold depending upon how it is acting at the time.
Hope this helps. Happy Holidays, Dan Stewart CFA®