A falling market is defined as a period where the investors see negative market returns. During this time, the value of stocks declined up to 15% or more from previous highs.
As an investor, if you feel that the market is about to fall and is bearish, you can utilize several strategies. The best strategy will depend on your investing time horizon, risk tolerance, and your overall goals.
Following are the strategies or tips for investors to survive the falling market:
- Sell your Investments
This is one of the safest techniques to adopt in a falling market. You can sell all your investments, hold cash and invest the profits in more solid financial instruments like short-term government bonds.
This strategy is widely used by many investors to minimize their stock market exposure and reduce the negative outcome of the bear market.
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If you sell everything ( called Capitulation) and miss the rebound of the stock market, you might miss out on the upside turn.
You can also take short positions to gain from a falling market like short selling or buying speculative put options. Both these methods will gain in value as the market falls. Please keep in mind that these strategies or techniques come with their own set of risks and restrictions.
- Opt for a Defensive Approach
A defensive approach will come in handy if you want to hold your stock market positions. This strategy includes investing in major firms with strong balance sheets, long operating history, and a good track record.
General economic or stock market decline has less impact on the large-cap firms which makes their stock values less vulnerable to a larger drop.
Companies that fulfill the basic needs of consumers and businesses like food, utilities, or suppliers of basic commodities like toiletries are called defensive stocks. The name defensive stock is given as consumers will need food and basic items even if the economy is in a bad shape.
These companies are unaffected by downturns due to their solid financial positions and enough cash reserves to fund their ongoing operational needs.
On the other hand, small growth businesses are generally avoided by investors as they lack the financial stability required to outlast the downturns.
- Try the Put Options
Put options are contracts that give the right and not the obligation to the holder to sell a security at a set price on or before the expiry date of the contract. Buying protective puts is a famous strategy to play defense.
Conclusion
As an investor, the most important point to remember is that a falling or bear market may be tricky for long-term investors as most of the stocks show a steep decline during a bear phase. The techniques mentioned above can only minimize the damage to a certain extent. But, it cannot be eliminated.
