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Should You Invest in a Bear Market?

The bear market that people have been predicting for years may have actually arrived. Market Watch is writing about a big bear market of several months duration.

The “big bear market” for stocks that market timer Tom McClellan has been expecting appears to have begun, as Tuesday’s broad selloff turned a key technical indicator down from an already negative position to convey a “promise” of lower lows.

McClellan, publisher of the McClellan Market Report, said there could be a pause in the downtrend this week, as his market-timing signals point to a minor top due on Friday. But with his “price oscillator” turning lower following the Dow Jones Industrial Average’s DJIA, +0.41%  425-point drop, and the S&P 500 index’s SPX, +0.33%  1.3% slide on Tuesday, he turned bearish for short- and intermediate-term trading styles. He has been bearish for long-term trading styles since Feb. 28.

“I have been looking for a big downturn in late April.We appear to have gotten that downturn now,” McClellan wrote in a note to clients. He said it is possible that the big down move pauses briefly in honor of the minor top signal due Friday, “but it should be a lasting and painful downtrend, heading down toward a bottom due in late August.”

This prediction is based on technical analysis and is certainly backed by lots of fundamentals. We have written about interest rates going up, too much debt, market volatility, and the risk of a serious trade war. And then the other day a Caterpillar executive said that the company’s earnings for the first quarter are probably going to be the high water mark for the year! And then stocks started to slide even when they had reported good earnings. The point is that the market is going to correct. What should you do?

Should You Invest in a Bear Market?

When the market starts to slide is it time to get out, simply readjust your portfolio, or scout out profitable investments? Two months ago we wrote about how to protect your investments in a bear market.

As a bull market comes to its end there are always investors who want to eke out that last little bit of profit. Because a dying bull market is often volatile those investor will wait for one last upswing before getting out. The problem is that too many investors wait too long and then see their portfolios evaporate as they wait for one last rally.

Years ago we wrote about investing in beer. When times are good people drink beer to celebrate and relax and when times are bad people drink beer to drown their sorrows. Companies that brew and distribute beer are like companies that make and sell soap, household cleaners and other basic household necessities. When a recession hits consumer goods companies continue to make money. And their stock prices often go up because investors move their money out of stocks that are hurt by a recession and into stocks that remain stable. Another way to protect your investments in a bear market is to find crash-proof and recession-proof stocks.

And the other alternative is to look for stocks that still have strong intrinsic value. And the most profitable investments are those that stand the test of time.

The general consensus is that you need to stay in an investment at least five years and probably ten to see the benefits of long term investing. The S&P 500 peaked at 1509 in November of 2007 and bottomed out at 683 in March of 2009. Ideally you would have purchased shares in an ETF that tracks the S&P 500 and done so in March of 2009. But a long term investor would have purchased in 2007 as well. Today the S&P 500 is at 2600 after peaking above 2800 in January of this year. Successful market timing can help but it is difficult to carry off time and time again. The point is that if you had bought the S&P 500 at its high point before the crash and held on you would be up around 80% today. If you had added to your portfolio as the market went down in 2007 and 2008 you would have done even better.

So, yes, you should invest in a bear market. Look for stocks with long term value and buy when their prices are depressed along with the general market. And then enjoy your profits over the years.





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