What to Do in a Bear Market?
Markets are frequently referred to as “bear” or “bull” markets. A bull market is one where most assets are on the rise ¾ raising only the question of which is best. A bear market, on the other hand, sees the prices of most assets falling ever lower. In this case, many investors are at a loss for what to do. Don’t worry, this article will help you make good portfolio decisions even when the stock board is completely red.
Why Bulls and Bears?
The origin of how the two animals came to represent market expansions and recessions admits some dispute. Some maintain that the term “bear” dates back to fur traders in the 1700s. However, a more popular theory is that the terms are a reference to the direction of each animal’s attack. Bears raise a paw and strike a downward blow, as a market crash shows prices dropping from high to low. Bulls begin crouched and explode upward into an opponent, as in a market rally, when prices rise from low to high.
Hold the Line
When there’s a market shock, your knee-jerk reaction might be to immediately sell your positions that have been performing well in order to secure your profits. Unless you’re in the business of speculation, don’t succumb to this instinct! Markets have been known to turn around in a matter of days after a shock. If that happens, you’ll have to pay taxes on the gains you realized, as well as commission to buy back into your positions. In the case of a market shock, sell only if you absolutely don’t plan on re-opening that position.
Everything Is on Sale!
When the market has been low, some traders will joke about securities being “on sale.” This is in reference to assets that they believe are inherently more valuable than their current market price reflects. Unless civilization as we know it is actually ending, the market will eventually recover. When it does, companies that are run well are likely to see ever-greater returns for having weathered the storm. If you’ve been very happy with a particular stock, it might be a good time to buy some more.
Lose the Real Losers
While it’s a wise idea to hold on to assets that have performed well and try to ride out the gloomy conditions, it’s another story with assets that have underperformed. If you’re holding some positions that disappointed you even when the market was on the rise, chances are, they’re priced even lower than during the bull’s reign. If these assets are equities, it’s possible that their prices may never recover. In such cases, it’s a wise move to cut your losses and sell.
The upside here is that you can write off your losses against your capital gains tax up to $3,000. If you don’t have any capital gains, you can roll the loss over each year for the $3,000 deduction until the total amount of the loss has been “used up.”
Consider Your Asset Allocation
Recessions are a good time to reconsider the allocation of your portfolio. If you were heavy in one industry and have been eyeing another for a few years, depending on how prices have fallen, it may be a great opportunity for you to switch things up! You may even decide to change the overall goals of your portfolio. Maybe when you were younger, you had aimed strictly for growth, but now you feel it’s time to settle down and focus on large dividends.
It’s never fun to watch the market tank when you’re invested. However, if you keep a cool head and play your cards carefully, you can make the best of it ¾ or better, make a profit!