I have no doubt there will be a massive bear market within 15 months from today. After a decade of bullish fever, I expect the coming bear market to be devastating for unprepared investors.
I am not the only one who thinks the bear will soon awaken.
Major hedge fund managers like Ray Dalio and Tudor Jones are sending out warning missives about the pending bear.
Dalio told the Greenwich Economic Forum, “The world, by and large, is leveraged long. When there is a downturn, I don’t think there’s much to protect investors.” At the same conference, Jones theorized that he expects the credit bubble to pop in response to the recent tax cuts.
Jones said: “The ratio of debt in the world relative to the gross domestic product is at an all-time high, but the reason no one talks about it or gets alarmed is you could have said that virtually every year for the past century. I don’t know whether we’re supposed to run for the exits. However, we are at a point in time that’s really challenging to that paradigm of ever-growing debt relative to the carrying capacity.”
He added: “Since the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire, in 1944, debt levels have expanded because of an economic circle of trust. That persisted through the financial crisis. However, those foundations are cracking.”
When these dire macro predictions are combined with the uncertain nature of the current political climate, climbing interest rates and questionable international trade picture, a very bearish portrait emerges.
The worst scenario of all for long-term investors would be a slow but steady descent punctuated by short, sharp moves in both directions. This type of market can be devastating for all but the most agile of investors. The long-term buy the dip crowd will continue to buy the dips, but then see their capital slowly dissipate as the market grinds lower. The buy and hold folks will merely watch from the sidelines as the money is gradually yet systematically drained from their retirement accounts. More active investors will attempt to average into the decline with each step in the process leading to additional losses when the market fails to turn around long term.
In other words, I expect a challenging market environment for most investors within the next 12 months.
Sure, it will be incredible times for short-term, risk-embracing traders with the sharp, short moves inevitably playable. However, for those not glued to their screens or with evolving algorithmic automated trading systems, I fret for their future.
So just what can the average stock market investor do to prepare for this likely inevitability?
Here are five ways to prepare:
1. Lighten The Load
Now is the perfect time to take profits on your long-term gains. Inspect your stock portfolio and consider selling those names that have soared in value.
I like to use a rating system based on percentage gains over the last 1, 2 or 5 years depending on your market perspective. Rank your stocks per the profits from the highest increases to the lowest. Cull the top 3-5 top winners depending on your diversification.
2. Raise Cash
Culling the top performers is an ideal way to raise cash for the market bargains guaranteed to emerge after a prolonged bear market. The only way to take advantage of these bargains is to have a cash stash ready to deploy when the time is right.
While it can be argued that holding cash is a negative due to diminishing buying power thanks to inflation, it remains the only way to quickly pounce on discounted stocks after a wash out.
3. Consider LEAPS
Buying put LEAPS on the major stock market indexes is a smart way to mitigate losses in the event of a bear market. LEAPS are long-term options with expirations up to three years in the future.
4. Own Precious Metals
Precious metals like gold and silver generally outperform during bearish stock market cycles. I am far from a gold bug, and anyone who is familiar with my writings knows I am usually very bearish on precious metals. However, the one time gold may shine in your portfolio is during prolonged bear markets.
5. Try Covered Call Funds
Covered calls are an excellent way to protect your profits in the event of a market downturn. However, due to the short-term nature of regular call options, semi-active trading is required to keep the calls alive from expiration to expiration. If you have a well-diversified stock portfolio, this can be difficult to manage.
Covered call funds are the solution since they are professionally managed. Funds like PowerShares S&P BuyWrite Portfolio (PBP) and Glenmede Secure Options Portfolio (GTSOX) make sense for the long-term investor.
Risks To Consider: The stock market may just keep going higher for years. There is no rule that states that the bear market must start within 15 months. All we can do is make an educated guess as to what to expect. Always be aware that anything can happen and in the stock market it is often the least expected thing.
Action To Take: Consider one or more of the above ideas to help weather the coming hard times.
— David Goodboy
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Source: Street Authority