I firmly believe that having a portion of your portfolio out of
stocks during a bear market is essential to protecting you from yourself.
I've thought about switching into bonds, which normally works
during bear markets because interest rates tend to fall when the stock market enters into a bear market.
So of course even with a balanced or conservative portfolio they will
decline during bear markets, but as you can see the declines are far less severe than an all equity investor.
The quality factor tends to outperform the overall
market during bear markets; this superior performance pattern was present during the 2008 - 2009 downturn.
For most average investors, a good rule of thumb would be to never own more stocks in a bull market than you're comfortable
holding during a bear market.
That said, several previous periods of increasing rates
happened during bear markets, like 1974, making alternatives to bonds tough to find.
Now, some of the biggest rallies
occur during bear markets, but few traders or investors are nimble or efficient enough to play the downside and profit well from them.
Even when investment - grade bonds have experienced losses, the price drops have not been of the same magnitude as stocks have
seen during bear markets.
Keeping a stock in your
portfolio during a bear market might work well for you in the long run if the numbers show that it could bounce back once the market improves.
However, it is true that when the market does have big down moves (
like during bear markets), they generally occur during the summer or fall.
Also, financial insiders are still reporting there is a lot of cash on the sidelines after people stopped investing in equities and other risky
assets during the bear market.
Strong intermittent advances are
typical during bear markets, and can often achieve gains of 20 % as we've seen in recent weeks, and sometimes substantially more.
The ratings agencies received a lot of blame for the collapse, which eventually led to the financial market
meltdown during the bear market of 2007 - 2009.
While active fund performance is generally very poor on average, it appears to be slightly less
poor during bear markets in this sample.