Scared of bear markets? Here’s how to destroy your fear.
Tips for using bear markets to your advantage
Welcome to The Profit Zone, where 12,000+ millionaires, CEO’s and high-performing entrepreneurs read the #1 financial newsletter on Substack, providing you with weekly insights on the stock market and tips you can’t find anywhere else.
If you want the benefits of being a premium subscriber, consider joining on a 14-day free trial.
You can test the waters before making any commitments.
Click below to unlock premium content free of charge for 14 days.
Tweet of the Week
Advertise with The Profit Zone
Do you have a business that needs some more exposure?
Want to get more eyes on your products?
Advertise to 12,000+ investors hungry for financial content.
Click here to fill out the form.
Weekly Market Update 🗒️💡
The S&P is up 10% YTD. While the Nasdaq is up 24.1% YTD.
What recession?
Index performance below.
Treasury bond yields continued to rise this past week. The 10-year yield is attracting more attention as it hovers around 5%, a level we last saw in 2007.
And I think you know what happened in December 2007.
The 2-year yield also reached a high at 5.15% as the Fed continues to maintain its position of another rate hike in the near future.
Higher bond yields are increasing volatility in the stock market.
Why?
Higher yields increase the cost of borrowing. When money is more expensive, people are reluctant to borrow.
Major players like US Banks and foreign investors are leaving the bond markets.
When the big fish start pulling their money out of the market, this puts downward pressure on stock valuations.
This “new normal” we’re seeing in bond yields could have larger implications long term.
In the equities market, we can expect more balance between growth and value in the market.
In 2020, fundamentals meant nothing.
Stocks were growing at ridiculous rates with no true value.
A circus monkey could have made money in the stock market.
Remember Gamestop?
A stock that made investors thousands of dollars, if you sold at the right time.
If you’re still holding this company, good luck to you.
The low rates we saw before drove investors towards growth and technology sectors.
We’re seeing a shift towards better valuation and higher dividend stocks with these higher rates.
My take: diversification is key.
There are ways to diversify away risk.
This is called specific risk. The risk of investing in the same kind of assets in similar sectors.
Let’s say your entire portfolio is allocated towards financials and REITs.
There’s a high chance you'd be down a lot of money year to date.
There’s also risk you can’t diversify away, called Market Risk.
This includes inflation, interest rates, wars, commodity prices, etc.
Things we can’t control.
But you can control your portfolio allocation.
And that’s something investors will need to focus on in the next 3-5 years.
What I’ve been doing:
I’m keeping about 20% of my total portfolio in a high-yield savings account.
I may be missing out on a couple of percentage points of yield in comparison to buying short-term fixed assets, like a GIC or CD.
However, that money is not locked up and I have access to it whenever I need.
It’s earning more interest than inflation, which means my purchasing power isn’t being eroded.
And I consider that money dry powder for if the stock market presents any opportunities that could build my wealth, like a total collapse.
Because always remember, wealth is built while the market is falling.
My focus right now has been building up my S&P 500 exposure. I have no issues owning the 500 largest US companies during a potential market downturn.
These are companies that have been able to fight back against the worst economic conditions and come out alive.
When you have a margin of safety like a well-performing index, that has historically returned an average of 10% per year, it helps you sleep better at night.
And I can tell you, there are a lot of investors losing sleep right now.
When you’re aware of what is happening in the economy, investing becomes easy.
Good thing you’re reading this newsletter ;)
Surviving & Taking Advantage of Bear Markets
If you don't want market volatility and economic uncertainty to obliterate your investing portfolio…
You must know how to navigate a bear market.
These periods can be challenging, but they are a natural part of the economic cycle.
With the right strategies and mindset, you can not only survive…
But also thrive during these times.
To survive, and even thrive during bear markets…
You just need the right strategies and mindset.
So, what are the strategies and approaches you need to navigate a bear market effectively?
Navigating a bear market requires a combination of proactive strategies and a disciplined approach.
For that, here are 6 tactics to reduce your risk and protect your portfolio:
Diversification: Spread your investments across different asset classes, industries, and geographies to reduce the impact of a downturn in any particular sector.
Strategic Asset Allocation: Review your asset allocation to ensure it aligns with your risk tolerance and investment horizon. Consider increasing your allocation to less volatile assets like bonds or cash equivalents.
Dollar-Cost Averaging: Invest smaller amounts at regular intervals to smooth out market fluctuations and potentially lower your average cost per share.
Stop-Loss Orders: Use stop-loss orders to automatically sell a stock when it reaches a certain price, limiting potential losses.
Rebalance Regularly: Ensure your asset allocation remains aligned with your goals and risk tolerance by regularly rebalancing your portfolio.
Prioritize Debt Reduction: Focus on paying down high-interest debt to reduce your overall financial obligations.
While bear markets are challenging for many asset classes…
Certain investments tend to hold up better during these periods.
These 5 assets provide stability and can offer growth opportunities even in a downturn: