Investing In A Bear Market
After six years of consecutive gains for the S&P 500, a downturn in the domestic market seems highly probable. Consider what happened the only two times in the past hundred years when the S&P 500 saw a 200 percent increase over a six-year period: the 1929 Wall Street Crash and the dot-com bubble bursting in 1999.
That is not to say that we expect a similarly drastic decline in the domestic markets but we feel there is a strong likelihood of a bear market in the latter half of 2015. If you look at the Kruse Asset Management model below, which use a variety of macroeconomic factors to gauge the future level of the S&P 500, we forecast a 24 percent decrease in value from the end of April to the end of November. This also fits in with the old Wall Street adage of “sell in May and go away.”
At KAM we believe in diversification to minimize exposure to risk for our clients, and by diversification we mean true diversification – investing across twenty different asset classes. When you’re trading you should think long-term when it comes to your investments. Your portfolio should be able to weather downturns in the market – better than the vast majority of others at least.
What are some of the best ways in which to outperform the volatility and uncertainty of a bear market though?
Bonds
Bonds can help offset losses made by other parts of your portfolio. The reliable stream of income they can provide from interest payments will be far more appreciated during a bear market than they have been by most over the past few years.
When looking at possible bond funds to purchase it can be of help to look at their past performance history (we recommend a minimum of three years) and how it correlates to the domestic market. Whilst such funds may have underperformed recently, in the event of a major downturn, it’ll be their chance to shine. Sierra Core Retirement I (M:SIRIX) and FundX Flexible Income (M:INCMX) are two great examples we are using to mitigate risk for our clients.
Alternatives
Due to the low correlation that alternative assets have with the equity and fixed income markets, they make a great investment in offering excellent diversification, particularly during a bear market.
One of the drawbacks raised is the lack of liquidity with regard to many alternatives but this shouldn’t be an issue with a well-balanced portfolio – if it is, you may have more serious problems!
Some examples include:
Low correlation ETFs
Managed futures
REITs
Precious metals
Blue Chip Stocks
The size of mega-cap blue chip companies in the US make them best equipped to deal with a bear market. Not only do they offer greater stability and larger dividends but they’re also capable of taking over struggling, smaller companies in such conditions.
International Stocks
When the domestic market takes a downturn, attention turns invariably towards international markets. Whilst some downturns in the US market can have a global ripple effect, there is in fact a lot of potential to be found in Europe in 2015.
This year Europe has finally started to recover from the lethargy it’s been in for the past couple of years, and with Germany making every effort to keep Greece within the Eurozone, many of Europe’s top companies can be seen as a prudent investment.
