I’m sorry to be the one to break the bad news, but we are in a bear market. Some pundits, however, want to keep investors in a bull mentality; because analysts, market-makers and Wall Street make more money when times are good.
Nobody wants to admit times are bad. However, most technical analysts declare that once the 50-day moving average of a given index crosses decisively below the 200-day moving average, that constitutes a bear market. In my experience, this often proves true.
The best defense for any correction or bear market is to have a long-term, broadly diversified portfolio. And in my twenty years of investing, I’ve learned that a few precautionary tactics can reduce risk, provide capital preservation and raise cash in a bear market. These are just a few suggestions.
Sell Modest Winners
By selling stocks you have a 1% to 7% gain on, you lock in those profits and don’t risk a winner turning into a loser. When the bear starts really mauling, you can buy right back into that investment at a lower price.
With that said, there is opportunity risk here; meaning that if the market climate remains bullish, you miss some upside when the the stock moves up. But if the stock’s story was good before, it should still be good then.
Another strategy is to sell the stock and replace it with an in-the-money call option. That keeps you owning the stock, but with less money at risk. I just did this recently with Wynn Resorts (WYNN).
I bought 100 shares of the stock at $70 and it went to $80. I sold out for a $1,000 gain, but purchased a March $60 call for $20, for which I paid $2,000. My maximum loss is $2,000, instead of much more in a significant decline, and I can sell that call at expiration and buy right back in.
Sell Modest Losers
By selling stocks you have a 1% to 7% loss on, you lock in those losses and don’t risk a loser turning into an ever bigger loser. If things do get ugly, you can still buy right back into that investment at a lower price (effectively averaging down) while possibly enjoying a capital loss tax write-off as well.
Yes, there’s also opportunity risk here if things don’t get ugly and the stock surges higher. Just like the previous example, you will miss some upside here; but again, if the stock’s story was good before, it should still be good then.
You can also use the same call option strategy I mentioned above to stay long, if you so choose.
Sell Big Losers
Nobody likes to admit that they have a big loser in the portfolio. In my experience, if a stock is a big loser, it means you got suckered in by a momentum stock, such as a Tesla (TSLA) or a Facebook (FB), and you failed to get out with the big traders.
Forget about the stock recovering … it will probably fall more in a bear market.
Alternatively, you were wrong about the story or the company was hit with a surprise blow. Well, again, the stock will only fall further in a bear market.
It’s time to get out. The upside is that you get a capital loss tax write-off. Plus, you can now save that cash on the sidelines to buy into a better stock.
Notice how I didn’t suggest selling big winners? You certainly can. But unless it’s a momentum stock, my experience suggests it’s better to hold onto it.
If the story is good, you’ll lose some ground, but that stock is clearly going to do well over the long term.
You could sell it in conjunction with selling a huge loser, which would offset your capital gain. Likewise, you could use the call option strategy I mentioned above if you wish to stay long.
As of this writing, Lawrence Meyers was long March 18 $60 WYNN calls.