Bracing for a Bear Market
Investors, it’s time to face the facts: “Your mutual funds are going to lose money in 2015,” said Chuck Jaffe in Market Watch .com. With the S&P 500 plunging 12.4 per cent from its May peak through late August, stocks are on pace for their worst year since 2008. Technically, it’s not yet a bear market—that happens when stocks have declined 20 percent from their peak—but some companies have already “crossed into grizzly territory.” Nearly 25 percent of stocks in the S&P 500 are down 25 percent or more in value. Unsurprisingly, many investors are wondering if it’s time to get out of the market before “more carnage” ensues, or whether they should try to buy in “before a rebound.” The truth is, there’s almost nothing you can do now to turn around your portfolio’s performance before the end of the year. My advice: Forget 2015 and focus on changing your fortunes “for next year and beyond.”
“The big question is whether the downturn remains a correction or turns into a bear market,” said Anne Kates Smith in Kiplinger.com. Although the U.S. economy looks healthy, the 6½-year-old bull market “is showing its age.” Investors probably shouldn’t worry about a “2008-like cataclysm,” but with an economic slowdown in China unsettling global markets, and the Federal Reserve’s looming interest-rate hike threatening bond prices, uncertainty abounds. “You can’t have a crystal ball, but you can adopt a game plan to help protect yourself,” said Tom Petruno in the Los Angeles Times. Your strategy will depend on when you’ll need invested assets. For younger people, bear markets can actually be a “gift,” allowing investors to buy low. But near-retirees planning to tap their nest eggs in the next five years should focus more on protecting what they have. Some advisers encourage their clients to keep enough cash in their portfolios to handle living expenses during down years without having to sell low, or even to buy stock if the market goes lower.
You might be considering hedging in the face of this “epic volatility,” said Joshua Brown in Fortune.com. But be careful: Some hedges merely represent “a different set of risks in disguise.” Investments like hedge funds, “black swan” funds, managed futures funds, gold, unconstrained bond funds, market-timing services, and other types of alternative investments can’t be expected to beat the bull market, but “the magnitude of their underperformance” in recent years has been striking. “Many of them have inflicted so much damage on investor portfolios that it would be impossible [for them] to earn their keep no matter how severe the next downturn becomes.” So be sure to think about those costs before hedging your bets. “There are some risks in this world that are worse than volatility.”
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