When the market is down, investors who do not have a plan often panic and sell off their investments. These investors will likely hold cash and only enter the market again once the bull run starts, leaving their cash idle for a prolonged period and missing out of lots of opportunities.
Panicking and selling is not ideal as there are ways to survive and even prosper in a bear market. If you think that a bear market is imminent, here are tips to help your portfolio weather the storm.
Shorting involves borrowing shares and selling them with an agreement to buy them back at a (hopefully) lower price later. This can be a very profitable strategy in a bear market if executed well.
You can short individual shares, the market (via index futures) or the ETFs (via Inverse Exchange Traded Funds). However, you should be aware of the risks involved with short strategies and have the tolerance, experience, and financial capital to withstand the volatility that comes with shorting the market. Therefore, Crea8 only offers this to our accredited investors. Besides, there are costs to bear when shorting stocks and index futures.
Sectors that can withstand a bear market are known as defensive sectors. These include health care, consumer staples, telecoms, REITs and utilities.
These companies hold up well in a bear market because they produce necessities (e.g. medicine, power and water suppliers) and are less likely to see their sales drop compared to companies that produce luxury and discretionary goods (e.g. car and watch producers). Hence, the share prices of defensive sector firms outperform in a bear market.
A company with a strong balance sheet and cash flow is better equipped to handle an economic downturn and more likely to be able to fund its operations despite the tough economy.
These include companies with consistent earnings and dividend growth, high cash flow to earnings, and low debt-to-equity ratios.
Some companies would have a history of paying dividends over the long term and would be able to hold up this practice even when their stock price falls. So, when the market falls, it could be a good time to buy these companies to add a source of passive income.
Another option is to reinvest the dividends while the share price is low for future capital gains. The share price of high dividend yield stocks would also likely appreciate in the longer run. The reason being that in a low interest rate environment, investors would buy into these high dividend yield stocks.
When the stock market falls, the value of most commodities like oil, copper and even silver normally fall. However, gold usually rises as it is the safe haven asset. Likewise, US government bonds would rise as investors perceive the US Dollar and US government as safe haven assets.
These days, investors have various options to gain gold and government bonds exposure. The most popular option these days are exchange traded funds (ETFs) as they offer investors an inexpensive way of adding a gold exposure to the portfolio without owning physical commodities or the actual bond.
Crea8 offers you the opportunity to manage and grow your wealth to weather a down market through our Goal based and Factor based thematic investing service.
Our Goal based investing service is theme based. During market downturns, we would encourage you to switch to our ‘Bear Market’ theme which involves buying high dividend stocks, gold and government bonds. This would ensure that your diversified portfolio can weather the storm and let you stay invested until you meet your chosen financial goal.
As your personal circumstances might change (e.g. saving less or making a withdrawal), you can update your personalised future savings plan. From the update, Crea8 automatically adapts to your personal circumstance and revises your optimal portfolio.
When the time is right, Crea8 will also advise you to switch to a ‘Growth Market’ theme which might include exposure to growth assets like stocks to ensure that your portfolio is well positioned when the bear market is over.
Crea8 allows you to take back control and build your own strategy to outperform in a bear market. Crea8’s Analytics empowers you to easily classify and identify stocks with certain characteristics (e.g. low leverage, high dividend etc.). Crea8’s Advisory allows you to use our algorithm to construct optimal portfolios based on different themes, industries and markets.
Alternatively, you can rely on Crea8’s professionally built pre-optimised strategies.
Crea8 offers market neutral strategies (long equities-short equities; and long equities-short futures) that can withstand market downturns to accredited investors. Contact us separately if you are interested.
For non-accredited investors, you can use Crea8’s algorithm based Advisory service to specify the defensive sectors that you want or use Crea8’s Analytics to help you search and find the defensive stocks that fit your criteria.
For each theme in our catalogue of strategies, we offer ‘Balanced’, ‘Value’, ‘Dividend’ and ‘Growth’ tilts to the strategies. So, you can easily switch to a ‘Dividend’ tilt if you wish to continue to invest in the same theme.
For any strategy that you create, you can backtest and evaluate the portfolio across various scenarios before committing real money.