Bear markets are bad. Unless you’re bigger, smarter and badder than the bear.
Which means, there are ways to take advantage of a bear market – a market heading south, with no real signs of turning around in the near term – and actually make money while all around you are losing theirs.
Or at least, use this very natural and expected phase of the market to your advantage.
But it’s not for the timid, and it’s definitely not for the risk-averse.
Averaging Down
One way to take advantage of a bear market is to add to your existing holdings by acquiring new securities at prices that are lower than the ones you own. This is also called dollar cost averaging, wherein the lower cost-basis shares, when combined with the total shares in a given security, result in a lower overall average cost.
When the market goes back up, the break-even target for the whole portfolio is lower than it would have been had you not averaged down. In essence, the gains from the new, lower-cost securities are larger than those of the previously-owned shares, pushing the aggregate gain higher.
Bottom Feeding
Of course, it doesn’t have to be that sophisticated. Some investors watch specific stocks closely in hopes of finding a killer bargain. in down (bear) markets a depressed stock price may not be the result of poor company performance at all. It may be the effect of the market in general going down, dragging otherwise healthy stocks with it.
This, in effect, creates buying opportunities for depressed stocks you’d like to own otherwise, or stocks you believe are trading below their reasonable market value because the company itself seems healthy. Of course, you must believe that the market will return to higher levels and take those stocks back with it, and if you’re right, your bottom feeding will have paid off.
If you’re wrong, well at least you own a stock in a company you think is solid.
Leveraging Failure
Not all investing strategies are that straight-forward, which means they’re not for everybody. For those with a high tolerance for risk and an understanding of certain sophisticated investment vehicles, such as put options and hedge funds, bear markets present opportunities to ride the failures of others – more accurately, the stocks they own – to your own private celebration of profit.
Put options are investment vehicles that allow you to sell 100 share blocks of stock at a specific price to the person from whom you bought the option. If the stock price goes down, then you can sell – or put – the stock to them at this higher price. Even if the stock is worth significantly less in the market.
Which means, you’ve just made money.
Why would anyone sell you such a right? Because you’ve paid them for it, generating an immediate return – and if you’re wrong, they get to keep your money, because all options have a time limit – and because they don’t believe the price will go down far enough within the given time frame to result in a loss.
Like any stock marketing investment, these strategies are a collision of beliefs and forecasts, resulting in both a winner and a loser each time. Even in bear markets.
