How should you prepare your portfolio for a bear market? - Seedly

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Bear market

Asked by Anonymous

Asked on 15 Apr 2019

How should you prepare your portfolio for a bear market?

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Sandra Teo
Sandra Teo
Top Contributor

Top Contributor (Apr)

Level 6. Master
Answered on 16 Apr 2019

Hello!

In a bear market, the safest strategy is to hold cash or invest in stable financial instruments such as short-term government bonds. This is an extreme method, and not often used. Investors usually take a defensive strategy by investing in defensive stocks, which are often large companies with strong balance sheets and long operational history. These companies have strong financial position that will allow them to meet ongoing operational expenses and thus survive the downturn. I would avoid small growth companies because they have lack the financial security required to survive downturns.

By nature, the financial markets are impacted by a recession. Therefore, investors may want to invest in sectors that thrive on recession, such as consumer staples and commodities. Consumer staples are typically the last products that a household removes from its budgets, therefore making it one of the safest. As economies slow, demand slows and commoditiy prices tend to drop. If investors believe a recession is coming, they'll often sell commodities, which drives prices lower. However once the economy moves into recovery phase, the growing economy would need inputs including natural resources. These needs grow as economic output grows, therefore pushing up the prices for such resources.

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