The SPDR S&P 500 ETF Trust (NYSE: SPY) briefly dipped into correction territory on Friday, falling 10% from its January highs.
A 10% correction means the S&P 500 is halfway to a bear market, so if the recent market weakness continues in February traders will need to be prepared.
Here are four tips for traders to remember to help them navigate a bear market.
It’s extremely difficult to avoid all the carnage that happens in the market during a bear market, but diversifying your portfolio can at least help you avoid the worst of the bearish trading action.
In addition, if there are any segments of the market or asset classes that actually avoid the downturn completely, diversification can ensure you have at least a little bit of green in your portfolio when things get ugly in the market.
2. Maintain A Watchlist
When the market is crashing and people are panicking all around you, it’s not a good time to be doing stock analysis in real time. One way to avoid being overwhelmed with information during a bear market is to maintain a watchlist of stocks you may be interested in buying under the right circumstances.
Conditions may change in the market that change your mind about whether or not a stock is a worthwhile buy, but a watchlist at least helps you narrow your focus from a universe of thousands of stocks down to a handful of vetted candidates.
3. Hedge Your Bets
Bear markets are when portfolio hedges can shine brightest. Hedging strategies such as buying S&P 500 put options are essentially like buying insurance for your stock portfolio.
It’s extremely difficult to time the bottom in a bear market, but adding a small position of S&P 500 put contracts to any large stock purchase you make during the bear market can help you offset additional losses or even potentially profit if the market dips deeper into bear territory.
4. Utilize Dollar Cost Averaging
Rather than guessing when the stock market bottom is in and going all-in on a handful of stocks you want to buy, let the market dictate the size of your position by taking advantage of dollar-cost averaging.
If you have determined the stocks you want to buy, start out buying a small position and then add to that position periodically as stock prices continue to fall. Once the market starts to rebound, dollar cost averaging ensures you have a lower overall cost basis for your holdings than if you bought your entire positions at the beginning of the bear market.
Benzinga’s Take: Bear markets can feel very scary in the moment, and they can be devastating for traders who are over-levered, under-hedged or exposed to too much risk. However, for level-headed, long-term investors, bear markets are no reason to panic and are excellent opportunities to load up on high-quality stocks at discounted prices.
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