What Is the Best Place to Put My Money in a Bear Market?
A bear market is a market decline of 20 percent or more lasting anywhere from several quarters to more than a year. Bear markets loosely coincide with recessions, typically starting and ending a few weeks or months ahead of an economic slowdown.
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Bear Market Dynamics
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Typically, a bear market will have three down legs: sharp declines, each followed by a weak rebound or a period of consolidation. Most stocks go down in a bear market, with the leaders of the previous bull market declining the most. The danger of a bear market is that it doesn't "announce" its start: What starts as a minor decline or a regular correction may deteriorate into a full-fledged bear market.
Cash and Equivalents
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Cash is the best place to put your money in a bear market. This can include money market funds, savings accounts, short-term certificates of deposits (CDs) or U.S. Treasury Bills with three- to six-month maturities --- any vehicle where the principal doesn't fluctuate and is readily available.
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Return Considerations
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Even if you earn next to nothing on your cash, it's still better than losing 20 percent or even 50 percent by staying fully invested during a bear market. If you lose 50 percent, you have to gain 100 percent just to get back to square one, which is where you'd be if you stayed in cash.
When to Go Into Cash
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The most difficult thing in a bear market is to decide when to go into cash. If you sell your investments too early, before a decline starts, you may shortchange yourself. If you wait too long to sell, you may be too late, when the damage has already been done. Nobody can call market tops and bottoms, so the only way to get out of the market on time is to have sound sell-and-buy rules, which usually force you out of the market at the beginning of a downturn and prevent you from making new investment purchases in a declining market.
Alternatives
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There are a few alternatives you may consider, depending on your time frame, appetite for risk, skill and resources: inverse exchange-traded funds (ETFs), dividend paying stocks and short-term high-quality bonds. Inverse ETFs go up when the market goes down, so you profit from a decline. Dividend stocks, especially in a tax-sheltered account such as an IRA or 401(k), buy you more shares if the dividends are high and you reinvest them when prices are down --- provided you have a long-term perspective and can stomach the decline. U.S. government or high-quality corporate or municipal bonds maturing in one to two years are safe because you get back the full face value at maturity and earn more interest than in cash equivalents.
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