Bear markets can be brutal. Luckily, they are typically shorter compared to bull markets. If you took the diversification advice seriously, you may get through the storm without losing much.
Wise investors can take advantage of the opportunities offered by bear markets to boost their portfolio and create a strong foundation for building wealth over the long-term. If you want to profit from a bear market, try the following ten ways.
Hunt for Good Stocks
In a bear market, you will notice that all stocks—even those of good companies—drop. But there is one difference: good stocks will always recover and skyrocket. The bad stocks never go up. If a good stock declines, that offers you an opportunity to buy.
If the price of the stock declines due to selling but the company is still making profits, going strong and even paying dividends, then that is a good time to buy if you are looking for dividend income.
Gems with Bond Ratings
In a bear market, the economic conditions are tough. You get to know who is managing their debt properly and who is sinking in debt. It is in a situation like this that you realize the value of bond rating. It gives you an idea of the creditworthiness of a company. An AAA rating is the best and such a company is worth investing in (as far as buying its bonds is concerned).
Rotate Your Sectors
A combination of stocks and ETFs allows you to diversify and apply the sector rotation strategy. Various sectors perform differently during different times.
In a strong and growing economy, businesses that sell “wants” perform well. And their stocks become lucrative. But when the economy is weakening, move to defensive stocks. These include utilities, beverages and food among others.
Go Short on Bad Stocks
Good stocks suffer in a bear market, but not as much as bad stocks. A bad stock will continue falling and you can take this opportunity to benefit from its decline. You can short it and make a profit when it plunges further.
Use Margin Carefully
Margin is buying securities with funds borrowed from your broker. It can be an awesome tactic. But know that you are working with the element of speculation.
Buy a Call Option
Purchasing call options is more of speculation rather than investing. The shelf life of a call option is finite and, if you’re not keen, it could expire worthless. But it is usually really cheap.
A Covered Call Option
If you sell a call option against your stock, you can say that you have written a covered call. It is a safe method of boosting your stock position yield.
Write a Put Option
Writing a put option means that you are obligated to purchase 100 ETFs or stock shares at a given price as long as the option is active. You can use this strategy to make money in a bear market.
Don’t panic or make any quick decisions. Bear markets don’t last forever.