The market has been on a downward trend and most assets such as cryptocurrency, stocks, etc., have dropped immensely. Add in inflation and people/companies are being hit hard financially. All of this is a strong indication that we are officially in a bear market. One might be wondering what a bear market means. Why did this happen? Is a bear market normal? What do you do to manage risk? Along with other questions. Although I am not a financial advisor, I will do my best to give you information, that can hopefully help you in this time of uncertainty.
What Is a Bear Market?
A bear market officially means that prices in the market have declined by 20% or more during the last two months or beyond. Market is anything dealing with the buying and selling of companies in exchanges, it allows retail investors (you) to provide equity or money for companies. A bear market does not mean we are in a recession. Can a recession still happen, yes, it is possible. Usually, recession is caused by a lot of things other than your favorite stock or assets not doing well. There must be multiple consecutive quarters of decline in the economy. A recession is when the economy is experiencing less spending by consumers or less production of services/goods and other things such as inflation, pandemics or war can contribute to a recession. On average bear markets tend to last 13 months. The longest bear market was recorded in 31 months after the dot.com bubble.
Why Did the Bear Market Happen and Is This Normal?
During 2021 when the pandemic hit most companies in the stock market, even growth stocks were doing well. Growth stocks are companies that continue to increase in value. These companies tend to not pay dividends due to utilizing profits for company growth. Dividends are what investors get paid for owning a stock, it's like a reward. So, entering the market during 2021 and even 2020, assets seemed to always produce profits, even digital (Crypto).
Now we are seeing a real market where the market is currently in a correction (declining at least 10%) has happened. Correction just means that the Federal Reserve Board (FRB) or Feds are no longer allowing quantitative easing. Quantitative easing allowed easy money for companies to get loans or capital. For example, interest rates were lower during these times and therefore companies could get loans or get capital because people had a lot of money. Printing money was heavy, which is essentially all inflation is.
The Feds can no longer sustain low interest rates due to inflation and must increase interest rates to correct the bullish trend which caused a bear trend. Companies that do not have good fundamentals are now losing profits at an all-time high and retail investors who invested in these companies are also losing money. In other words, there is no longer liquidity in the markets being produced by the feds through quantitative easing, bad companies cannot get loans to help their businesses stay afloat, due to high interest rates. All this to say bear markets are normal, markets cannot continue to be on a bull or upward trend.
Mitigating Risk
Now that we understand why the market is in a bear trend and potentially a recession is around the corner, we must know how to mitigate risk. These are ways, that I plan and currently do to control risk in this current market.
Educate Yourself
If you have a lot of knowledge in the markets, congrats that’s great but continue to learn and grow your prowess in investing. There are books that will help you understand how you can utilize different strategies to make money in up or down markets. In addition, there are great podcasts that give you a plethora of knowledge on the markets and how to invest. A few of my favorite are Earn Your Leisure, 19Keys, Wallstreet Trapper and BitBoy Crypto. I also like to have applications that help me understand what may be going on in the markets, for crypto, coin gecko and coin market cap. For the market, yahoo finance, CNBC for economy reports and foreign exchange market information, trading view, and stockcharts.com. All of these give me information about the current market. Educating myself allows me to learn new strategies to mitigate risk or make profits.
Long Term Invest
You must long term invest. I know that trading can be super fun and can instantly produce big profits or losses. But to be successful in the market one must have a long-term portfolio. This entails investing in companies that are blue chip companies or top in their sectors. Also, the top crypto assets. These companies have reputable technicals and fundamentals, meaning their net profits should be positive. It is imperative to not invest in negative companies or startups especially when the markets are in correction, bear, or potential recession.
Buy and hold, dollar cost averaging, dividend investing has produced positive returns in most cases. Buy and hold strategy, is buying a company at a good price and holding it by investing regularly. Dollar cost averaging means you invest in the companies you like regularly regardless of the price of stock. Dividend investing is buying stocks and having multiple shares to produce passive income.
Although you may have lost money now, hold your reputable assets/companies. The bear market will past, and returns will come back if you invest in the top stocks. Think of investing in ETFs and Indexes to add diversification into your portfolio. In addition, the price point of a share is important. When you purchase a stock, the price matters. Everything is on sell right now, if you believe in the company why not invest while it is on sell.
Trading
Once you have your long-term portfolio or if you just want to be able to produce some capital you can start to trade. Depending on the amount of capital you have and understanding you are now able to make money in a bear or bull market. There are multiple ways to trade, such as, day trading, swing trading, option trading, etc. Day trading is when you buy a stock and sell it the same day, with day trading you would need time to check the trends of the markets and news. Swing trading (my favorite) is when you buy a share and sell it a few days and weeks later, this is great if you do not have all day to sit and watch every move in the markets.
Option trading (also my favorite) is when you buy a contract base on the trend of the stock. If you think the stock is going up you place a call, if you think the stock is going down you buy a put. To buy a contract you pay a premium price and can decide to sell the contract or execute and buy the shares at the strike price. A contract is the option to buy or sell 100 shares of a stock at the strike price. There is more to trading but this is a quick overview, maybe I will do a write up for trading. The most important thing about trading is having a game plan and practicing. Trading is risky, you can lose a lot of money. Paper trading is a great way to start, it is not your real money and allows you to invest in real assets. Some great paper trading sites TD Ameritrade and trade station, also journal your trades so you can track your wins and losses.
Wait on the sidelines
Having cash on the sidelines and waiting for the right time to enter the market is a great ideal too. Just adding money in your brokerage account or saving for more funds to invest in better days is a strategy also. Furthermore, buying companies on sell with the capital you have is why you wait on the sidelines.
Conclusion
Remember the markets will not always be like this and in bear markets, even recessions, generational wealth is made. Continue to mitigate risk and invest if you are in the position to. Although, this write up was mainly about stocks, digital assets can be invested in the same way. Even Warren Buffet and many investors believe in buying when fear is at an all-time high. #WAGMI, ALL THE BEST.
