Market Downturns: Prepare For The Bear
Predicting when a bear market would strike is no easy task, compounded by the fact that many market events are rationalized only in hindsight.Today’s knowledge and tools, however, mean that it is possible to make reasonable guesses on the onset of a bear market.
Many signs can suggest a decrease in consumer confidence.Higher borrowing costs, coupled with weakness in lending stocks, usually signify that investor confidence isn’t what it used to be.Stocks may not lead the rally as often as they did during the aplomb of the bull market.
Image source: Bloomberg.com
Consumer confidence may also wane, which can be a strong indicator of a potential downturn on the horizon.
Ironically, the very overconfidence of investors could be a sign of a bear market ahead. Avoiding overconfidence could be one of the most important skills any novice investor can learn.
Even if bear markets cannot be accurately predicted, it pays to be prepared for them anyway. Because the losses of a bear market cannot always be recovered easily, the losses can be avoided altogether by relying on a more diversified investment portfolio. Although these assets may not always deliver the same gains as stocks in the long run, they provide smaller investors the necessary hedge against the onset of bear markets.