I have a friend who's an engineer. As a result, he thinks that he's got everything covered, including his investments. For the most part, he does - so he doesn't often ask for my input.
But there's one area that he hasn't planned for. You guessed it: a bear market.
When the first wave of the coronavirus selling hit, he came to me.
He asked simply, "Should I have a bear market plan?"
I asked him whether he has a plan for retirement; he said he does.
So then I asked, "Well, why wouldn't you have a plan to take care of anything that might get in the way of that retirement?"
"I don't know... because things happen, and I can't stop them."
Bingo - the answer everyone gives.
"Things happen, and I can't stop them..."
But they're wrong.
Having an insurance plan for your portfolio is just as, if not more, important than any protection you'll have.
Many people had to delay retirement after the 2007-2008 crisis. But still, most people try to ride out a bear market. They get nervous about selling too soon or buying too early.
It's not about getting the timing exactly right. It doesn't have to be complicated.
There are just three critical parts to any bull or bear market plan that can help you prepare for whatever the market is getting ready to throw in your direction...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Don't Go Another Day Without a Plan
These are the three places to start when protecting your portfolio against the inevitable bear market return:
- Identifying when the storm is coming with market technicals and psychology.
Markets generate a lot of noise when they are making the transition into a bear market trend. The noise often comes from analysts, media, and government officials.
This often drowns out what you should really be watching, which is the data and real psychology of the market. These two alone will give you an 80% chance of calling the next 20% to 50% decline in stocks.
For what it's worth, the same tools will tell you when the market is ready to go 20% to 50% higher, so learn this and practice it with me.
A simple number you'll hear me talking about over the next few months is the number of companies in the S&P 500 that are trading in a bear market trend. Around two weeks ago, the number was 106, and today it's 246 (almost half the index). I'll tell you what to do with this information as we progress.
- Identifying the leading and lagging sectors.
Traders and investors always follow migratory patterns when the market is undergoing changes. Think about it: They do what they have been trained to do, just like birds migrating south when it gets cold.
Certain sectors will start to see more and more migration of money as the market gets more and more nervous. This is something you must actively watch and follow, but its value is incredible.
Defending yourself against a bear market means getting out of the crowded sectors before the rest of the market starts to smell smoke.
I'll monitor this and update you on where the money is moving so that you can be in or out of these key sectors before the biggest money makes its move.
- Thinking independently and acting instead of waiting for the crowd.
Here are two quotes that hit the nail on the head. First, John Maynard Keynes said, "The difficulty lies not so much in developing new ideas as in escaping from old ones."
The old ideas of surviving a bear market are riding it out, thinking you can’t change the outcome. But it’s time to let that idea go – even if your friends, neighbors, and coworkers say they are “riding it out.”
The second quote is by none other than Warren Buffett: "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."
In a nutshell, don't listen to the noise, and don't buy or sell what everyone else is buying and selling. This gets to the core of my data-oriented, independent thinking Portfolio Protection Plan.
I'll be back with you soon to talk in-depth on the first step I mentioned here: Identifying when the storm is coming with market technicals and psychology.
We'll take a deep dive into the current market situation and start giving a clear answer on where this market is likely to head over the next six months and which indicators you should be watching along with me.
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.