Preparing for a Bear Market

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Considering that stock market has been mostly in the red this year, there is a solid chance that this trend may continue and turn into a more protracted bear market. This makes it a good time to take steps to prepare for this possibility.

Market Correction or Bear Market

From the moment at the end of May, when the Standard & Poor’s 500 reached its peak to the end of last month when it bottomed out, the market dropped 12.4 percent, which is defined as a correction as it is within the 10-20 percent range.

In some cases market corrections can be a break which refreshes the market as it creates more realistic price-earnings ratios and more a reflective measure of value. However, out of the last 20 market corrections, seven led to a bear market. That means statistically, there is a one in three chance that a bear market will follow this current correction.

Patience is Key

The S&P 500 has returned a cumulative 25.1 percent increase on average, five years after the start of bear market. Of course, not all bear markets are the same, and some can hit the stock market so hard that consequences cannot be avoided. While the market does not seem positioned at this time for a deep bear market or a series of smaller ones it is good to consider the possibility.

How to Prepare

The first step is to get rid of more speculative holdings, making sure to transfer the funds into blue-chip stocks and other stocks with strong cash flow and consistent dividend yields. Ensure that some of the portfolio is in lower-risk bonds and bond funds which will provide a consistent annual income and offer less catastrophic liquidation options.

However, make sure not to sell all your stocks, since most investors should always have at least half of their retirement assets in stock. Whether a bear market is imminent or not, now is the time to assess how your portfolio is balanced and the potential impact a bear market could have to it.

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