Three Ways to Protect Your Investments in a Bear Market

Stock markets across the globe plunged at the beginning of the week . They recovered somewhat and then resumed their slide today. More and more analysts are saying that a bear market is on the doorstep. CNBC warns of a big bear market.

The dramatic stock market sell-off earlier this week should be viewed as a turning point, according to analysts.

“Our ongoing concerns about the recovery’s tenure have been thrown into sharper focus by the steepest market sell-off since the credit crunch,” Eoin Murray, head of investment at Hermes Investment Management, said in a research note published Thursday.

On Monday, the Dow dropped 1,175.21 points, having briefly declined more than 1,500 points during the session. And while U.S. stocks have since pared some of the losses sustained during a cascading market plunge earlier this week, the Dow, S&P 500 and Nasdaq are all down more than 4 percent since Friday.

If indeed a bear market is about to take hold what should you do? We offer three ways to protect your investments in a bear market.

Be Happy with the Profits That You Have Made

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. The old saying is that you do not have a profit until you have taken a profit. If you got in or back into the market after the 2008 crash you have probably seen a very nice profit on your investments. If you agree that a bear market is in the wings, one of the ways to protect your investments is simply to sell part of your portfolio and hold onto cash until the correction or crash occurs at which time you can reinvest.

Crash-Proof Investments

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.

Beware of Bonds and Stay Short

US monetary policy is about to tighten. Quantitative easing is gone and quantitative tightening is on its way in. The Fed will be borrowing less money and it lets its bond portfolio expire and rates are likely to go up. If you sell stocks or real estate because you fear a crash you may want to make a little interest on the cash you are holding. The problem is that you might get trapped in a low yield bond as rates go up so stay with short term issues.

How about Offshore?

We wrote recently about investing offshore. There are good reasons to diversify outside of the USA, especially with ADRs. But all markets are likely to fall if the US market crashed. For now cash is your friend as you evaluate investment opportunities for after the market bottoms out.

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