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Strategies to Deal with a Down Market

During a down market many investors undertake the following strategy. They transfer their stocks into cash and wait until the market starts to move up again. They do this in order to protect their capital.

Despite the fact that this strategy sounds as a good movement on the part of investors, it hides its dangers and may not work for every one.

Problem 1

One of the problems of cashing out is that you never know for certain that the market is really going down in a steady fashion. The decrease may be a temporary event, which may not last for a long time.

As a result you may end up selling your stocks to purchase them back when the market corrects itself after a short period of time. This will result in paying higher prices. What you actually have done is selling at prices that were decreasing and purchasing back at prices that are going ahead.

Doesn't sound financially logical, right?

Problem 2

Even though you were right that the market is becoming bearish, you cannot know for certain when it will recover back to its healthy condition. There might be several false beginnings of recovery before the market really starts to correct itself.

Previous reports demonstrate that the first 12 months are the ones during which the profits from a down market are experienced. However, you cannot be sure that you will not fail to see some of these months and as a result lose some of the gains.

We recommend inaction during such conditions if you have some time until the money you have locked in stocks is needed. You can do this by transferring a portion of your assets into defensive stocks, which provide a certain degree of protection during such conditions.

Industries that issue defensive stocks include:

Utilities
Food companies
Grocery companies
Drug makers and etc.

These industries successfully manage to withstand the negative effects of a bear market.

However, your investment possibilities are significantly narrowed if you will soon need the money you have invested in stocks. Thus, you are facing the bad alternative of selling while the market is down. However, you should not be hasty and try to find an investment solution that will provide the needed protection.

If you are near your retirement years you can consider transferring your assets into defensive stocks. The closer you come to retirement the more you should consider the transference of assets to fixed income securities.

Finally, no matter in what situation you are when the down market hits, try to be a passive observer and wait for the market to correct itself.

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