5 ways to protect your savings and to avoid mistakes in a bear market
Nobody wants to lose money but you can survive a bear market if you stick to the basic survival guide. Here are ways to protect your savings:
1. Don’t try to call the low
One of the biggest mistakes investors make in a bear market is thinking they can pick the bottom. It’s nearly impossible to call a market low. Bear markets are not quick events. They typically last 21 months on average. Bear markets are extremely volatile. It’s not uncommon for rallies to occur in bear markets before reaching a final low. Bottoms often take months to form.
Tip: Stay disciplined with your long-term asset allocation.
2. Don’t cash in
Another big mistake that investors make in a bear market is moving to cash. Cash is safe, and stocks are risky in a bear market. But that doesn’t mean cash is the answer, especially if you’re saving for retirement that’s decades away. No doubt, cash minimizes paper losses when stocks are in free fall. But stocks don’t stay down forever. You have to be invested to profit in a market rebound. You do not have the crystal ball that tells you when this happens. The recovery can be quick and you too late. The problem is most people who get out of the market won’t get back in at the right time. In earlier bear markets, it took years for investors who moved to cash to come back. So they missed much of the rebound after selling on the way down.
Tip: Stay disciplined in your long-term plan.
3. Don’t take too much risk
Reaching for the biggest gains and investing only in the riskiest stocks is a recipe for disaster. You must build some protection into your portfolio. Too often, people are chasing superior returns and forget about managing risk. A good investment portfolio needs to have a balance of accumulation and protection, to help ensure all those funds you spent time building don’t disappear the next time a black swan event occurs.
Tip: Stay disciplined in your asset allocation and well balance your portfolio.
4. Go conservative
The average investor’s portfolio is way too aggressive for their needs and for their ability to psychologically take on the risks of bear markets. People end up losing more money than they can afford to lose. Pare back risk to your changing personal situation, especially as you age and near retirement. Investors will end up taking too much risk later in life and will suffer losses they won’t recover from. This sometimes forces them to continue working or they end up falling short in savings.
Tip: Adjust your portfolio to your current personal situation.
5. Don’t try to time the market
Getting out at the market top and getting back in at the market bottom is pretty much impossible to do. Don’t even try. The worst thing investors can do during a bear market is trying to time the market. A real long-term investor stays the course and reap the gains the stock market has historically delivered.
Tip: Stay invested.
General Tip: Keep calm – carry on. Do have patience and do prepare now for the next bear attack. For those that suffered significant losses in their portfolio, time will be their greatest ally. Do everything you can to avoid letting the next bear market, and there will be a next one, decimate your savings. Build in some protection that stops you from losing your shirt and guarantees you, the income you need later on in life.
Sven Franssen