How to Survive and Thrive in a Bear Market

It is not a matter of "if", but a matter of "when" the next financial crisis will occur. Are you prepared?

As many assets continue to set record highs, and after years of relatively smooth sailing in the markets, I believe it is time to consider the fact that a severe correction will occur in the future. It is very important to accept this reality, and start to plan now so that you will be well prepared. I believe the worst situation is to be caught off guard, and surprised by moves in the market. Rather, investors should be prepared for every possible outcome, and have a plan to conserve and grow their wealth no matter what happens.

Nobody can predict the markets perfectly, and a market crash could occur next year, next month, next week, or even tomorrow! It can be scary to think about this, but professional investors and the smart money understand this risk, know how to minimize it, and also how to use it to their advantage. There are always ways to profit in a market, no matter what direction it goes. In this article, I will be discussing possible options and strategies that could be used to survive and thrive during a crash.

Safer Assets

The number one priority should be to conserve your wealth. All asset classes are not created equally, and each carries varying levels of risk and reward. Traditionally, safer assets include: investment grade bonds, and precious metals. By moving money from riskier securities such as stocks to safer assets, you can decrease your exposure and downside in a market crash. When you see that a certain asset class is overvalued it can be a good idea to take your profit, and move it to safer assets to weather the impending storm.

Cash is King

In a bear market, cash is king. Corrections in the market occur because prices become way overvalued. Usually during times of crisis, markets will often over correct, and present the opportunity to buy at very undervalued prices. Once a crash happens, and you see that prices seem fairly valued, that could possibly be a good signal to rebuy volatile assets at a cheap price for a greater return. As the great investor Warren Buffet once said, "be fearful when others are greedy, and be greedy when others are fearful". In order to take advantage of these opportunities though, you will obviously need some money on the side lines. It is always smart to have some 10-20% of your wealth in cash. In overextended markets, this is especially important.

Short Selling and Options

Another more advanced way to profit during a bear market is by using stock options and short selling. These two strategies allow you to make money betting against the market. When shorting a stock, you borrow and sell it in hopes of rebuying the stock at a lower price in the future to profit the difference. Shorting can be risky, because if the security suddenly goes up then you can lose a substantial amount of money.

Put options are a good alternative to short selling. By utilizing put options, you can bet against the market with limited downside because you can only lose the cost of the contract. Yet, they also give very good upside because each contract is used to control 100 shares of the underlying security. They can also be utilized as a sort of "insurance" for your long positions. By spending a little bit of money on put options, against securities you are long, you can hedge your bets, and make money even if they suddenly go down.

Conclusion

I hope this article has been informative to you, and opened your eyes to more strategies and opportunities available in the financial markets. The number one piece of advice I can give you is to never panic, and never trade emotionally. You will get eaten up by the markets. Always take a logical approach, and always have a plan.