If a Bear Market Is Coming, This Is the Very First Investing Move I'm Making
Key Points
While it is not yet underway, some early markers of a bear market are already in place.
Although true buy-and-hold investors shouldn't worry too much about bear markets, most everyone eventually picks up a stock or two that they don't actually have long-term confidence in.
Your holdings at any given time will ideally reflect the possibility that a bear market is brewing, but also the possibility that one isn't.
Is a bear market on the near-term horizon? Nobody knows for sure. But red flags are certainly waving.
Interest rates are rising, while bond yields are setting up a renewed inversion of the so-called yield curve. Inflation is grinding away at the economy, too. That's why I'm at least mentally preparing now for the possibility of a more serious and prolonged setback for the stock market, starting with one particular move.
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But first things first.
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What is a bear market?
A bear market isn't just an ordinary, short-lived correction of inflated stock prices. Corrections are common and rarely caused by major economic headwinds. While a bear market is defined as any 20% pullback from a market peak, data from mutual fund outfit Hartford show that the typical bear market drags the S&P 500 (SNPINDEX: ^GSPC) down 35% from its peak over the course of about 10 months. And, more often than not, they seem to be triggered by a specific set of difficult economic circumstances that only time can resolve.
Perhaps more important to investors, it may well be worth steering your portfolio clear of the brunt of a bear market.
My next strategic move
Don't misread the message. Timing the market is difficult. It can be dangerous, in fact, simply because it's so easy to make entries or exits at what ends up being the wrong time, place, and price.
It's not necessarily wrong, however, to protect at least some of your portfolio from the impact of a bear market by shedding the positions you know you don't want to bother owning during the next bull market. Given the likelihood that other investors feel the same way about these very same stocks, there's a good chance these tickers will be hit particularly hard during the next bear market, since they're less likely to rebound in full when the next bull market begins.
These names may or may not be so easy for you to ferret out. So, try this: Identify your portfolio's positions that you know are true "forever" holdings that you want to stick with even if they suffer a prolonged price setback. The stocks that don't pass that test are most likely the marginal ones that you also don't want to be holding when the next bear market begins.
While I've not personally culled anything yet, I've already begun this identification process (although to be fair, this is the sort of screening I regularly do anyway).
No real downside
And what if I'm wrong? What if a bear market isn't brewing?
That's OK. As described, I'm not shedding any names I know I want to own forever, even if they're temporarily undermined by a bear market. I'm only getting out of the names I'm not convinced will be worth holding during the next bull market ... which, if I'm being intellectually honest, aren't exactly must-have stocks in the meantime either.
The worst-case scenario with this process and underlying mindset is just that I've usually got some cash available for more promising long-term opportunities as they surface.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.