A bear market is defined numerous ways. One of the most popular is a 20% decline that lasts for several months. The challenge with this definition is by the time you realize you are in the bear market, there could be serious damage already done to your portfolio, retirement money, and your psyche. The best way to survive a bear market is to be prepared for one.
There’s nothing wrong with preparing for a bear market, even if it’s in the early stages. Think of it as preparing for a hurricane that’s coming into your hometown. Do you get supplies, board up the windows and get to higher ground before or after the storm hits? Obviously, the more advanced notice you have, the easier it is to get ready for the coming storm. The same is true with a bear market, although it can be more challenging than reading a weather map.
The first thing to look at is the major market indexes such as the S&P 500, NASDAQ 100, Russell 2000 and the Dow Jones Industrial Average and their relation to their respective 200 day moving averages. While a first break may not signal that a bear market is here, a sharp move below the 200 day moving average without a move back over it is often times the first signs of a bear market taking hold. If price does snap back above the 200 day moving average, but only for a brief time, it’s time to get ready for a bear market.
Watch for a sharp increase in downside volume and range expansion. Volatility is a measure of price variation over time. Increased volatility happens when volume swells and range expands. This can hit your account much harder than bull market pullbacks, as those tend to be orderly and in line with the bullish trend, while a bear market has its own different set of stock market trends to learn and profit from.
Look into all options for your retirement account. While you won’t be able to short outright stocks (and may not want to), are you able to choose short funds or inverse ETFs? Self-directed IRAs should allow you to take advantage of these instruments, but you will have to check with your plan administrator if you have a 401k. There is always an option to stay in cash or money markets if you don’t want to take any chances timing the market or shifting allocations during a bear market. While this won’t allow your portfolio to appreciate in value, the tradeoff is safety. The only concern is that you don’t get complacent, and continue to pay attention as the market shifts and you decide you want back in the stock market.
There will be plenty of people telling you to stick it out and ride the bear market to wherever it’s going, because all will be ok. That attitude is a very dangerous one, especially if you are close to retirement. There may not be enough time to recoup a serious drawdown in your account as you wait out the wrath of the bear market. Make sure you do a thorough analysis of your goals and your current market allotments.
How you manage your portfolio is entirely up to you, and this article is in no way investment advice. It can’t be, because there is no way to know everyone’s individual financial situation and needs, especially regarding stock trading. Discuss with your broker, plan administrator or financial advisor what steps are needed in order to secure your money if you feel a bear market is approaching, or has already arrived.
this was originally published on bearmarket.posterous.com