The SPDR S&P 500 ETF Trust briefly slipped into corrective territory on Friday, down 10% from its January highs.
A 10% correction means the S&P 500 is in the middle of a bear market, so if recent market weakness continues into February, traders will need to brace themselves.
Here are four tips traders should remember to help them navigate a bear market.
It’s extremely difficult to avoid all the carnage that goes on in the market during a bear market, but diversifying your portfolio can at least help you avoid the worst of bear trading.
Also, if there are any market segments or asset classes that actually avoid a downturn entirely, diversification can ensure that you have at least some green in your portfolio when things go wrong in the market.
2. Keep a Watch List
When the market is crashing and people around you are panicking, now is not the right time to analyze stocks in real time. One way to avoid information overload during a bear market is to keep a list of stocks that you might be interested in buying under certain circumstances.
Market conditions may change, changing your mind about whether to buy a stock, but a watchlist will at least help you narrow your focus from many thousands of stocks to a handful of proven candidates.
3. Hedge your bets
Bear markets are when portfolio hedging can shine the brightest. Hedging strategies such as buying put options on the S&P 500 are essentially the same as buying insurance on your stock portfolio.
It is extremely difficult to determine the bottom time in a bear market, but adding a small S&P 500 put position to any large stock purchase you make during a bear market can help you offset additional losses or even potential gains if the market plunges deeper into a bear market. . territory.
4. Use dollar cost averaging
Instead of guessing when the stock market will bottom and going all-in on the few stocks you want to buy, let the market dictate your position size using dollar cost averaging.
Once you have decided on the stocks you want to buy, start by buying a small position and then periodically increase that position as stock prices continue to fall. Once the market starts to recover, dollar value averaging provides a lower total value of your holdings than if you had bought all your positions at the start of a bear market.
Bear markets can seem very intimidating at the moment, and they can be devastating for traders who are over-leveraged, under-hedged, or exposed to too much risk. However, for even-tempered long-term investors, bear markets are not a cause for panic, but a great opportunity to buy high-quality stocks at discounted prices.
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