How to Manage Risk in a Bear Market

Nate Crosby |
Categories

As the glory days of free money come to an end (for now), we are fielding a lot of questions about how to protect investments in a down market. Since January, we’ve watched a steady decline and even if you aren’t heavily invested in the stock market, you are being hit hard at the gas pump, in the grocery store, wherever you go – you name it, it’s unavoidable! 

Today we’re talking about your 401k investment strategy and giving tips for riding out a bear market.

What are target date funds? 

Target date funds have been getting some press lately thanks to a recent study by Bank of America. Unfortunately for target date funds, this study is poking some holes in the fundamental way these funds operate. Bottom line, as an investor you should 1. know if your 401k uses target date funds and 2. give us a call so we can help you analyze performance.

While it’s extremely important to remember that target date funds are better than not investing at all, it also might be time to take a second look at your strategy. The study reported that, on average, target date funds perform 2.4% worse than the S&P 500 but have similar volatility. These funds have served as a ‘set and forget’ approach to investing as they are designed to rebalance over time without considering things like economic performance. With your retirement date in mind, the funds act more or less aggressive based on your time horizon alone. This passive approach to investing brings with it some trade-offs – for example you’ll likely experience high volatility for benchmark performance. 

If you’re going to trust someone to manage your wealth, we recommend you work with an advisor who has knowledge of market cycles and possesses strategies for opportunities for growth in both up and down cycles. 

Protecting downside in a down market 

With quantitative tightening underway, it’s unlikely we’ll see the light at the end of the tunnel anytime soon. Year over year we have little control as to how our investments perform but what we can control is how we manage risk. It starts by understanding where we are in the cycle and then ensuring your account is invested appropriately. That is how we can protect the downside. 

Here are some hedging strategies that offer non-correlated options if stocks are not doing well:

  1. Diversify your asset classes 
    • Gold: while there are pros and cons to owning gold, if you run a back test, you’ll find that generally gold acts inversely to stocks and keeps pace with inflation (pro tip: if you go this route do your homework – there are various options to owning gold) 
    • Real-estate: as a long-term option, real-estate tends to correlate with stock performance but historically has been less volatile than the stock market (other than 2008 housing market crash) 
    • Commodities: historically they have not produced high returns but there are times (like now) where commodities are performing well (hint: supply chain constraints and prices are going up) 
    • Agriculture & Energy: keep your eyes on these areas, too 
  2. Shorting an investment/stock/ETF – making a bet that the investment will go down in price, purchase at discounted rate and you profit on where you shorted it at (pro tip: a safer way to do this is a short ETF – we like SH or PSQ).

Remember that most years the market goes up – in fact the way the market is set-up is poised for growth by putting things like retirement savings into the market. We believe the cycle is still trending down in the short term and we believe we have adapted our models to position us for success when the market turns. Know the cycle and stay steady with your investment strategy.

Speaking of real-estate 

We bought our building in Ashland! For anyone that hasn’t had a chance to visit, if you’ve seen the movie Shawshank Redemption then you’ve seen our lobby! There’s a scene where Andy enters the bank to withdraw the warden’s money – that’s us! We still have the teller stations and vault for anyone that wants to come and take a selfie! 

We have rental offices available if you know anyone looking for an affordable space right in the heart of downtown Ashland. It’s walking distance to lots of shops and restaurants. We also need a handyman! If you know someone that is somewhat local and looking for a few hours of basic handyman work a month, let us know!