Previously in part one, the article suggested two approaches to survive during bear markets. Those were dollar cost averaging and calibrated risk. This article continues the second and the third part of the tricks to deal during the bear market. The third is diversifying but without disengaging. Here is the reason why.
During bear markets, the growth of stocks is extremely high than the stocks’ value. As a result, the lower-risk stocks generate long-term returns which are the same to those riskier ones. Some diversification into value or when portfolios fall in speculative stocks due to the bear market still is still able to pay dividends. Plus, it could act longer after the bear markets cool off. In a diversified portfolio cash has a significant role. Although it does not create more yield, the cash reserves buying power that could help create opportunities during bear markets.
However, it is not suggested to place more of your retirement account into cash during bear markets. This is because you will encounter difficult uncertainties like when and where you should redeploy it. Finally, you could also face diminished long-term returns. Planning market timing is indeed hard. Meanwhile, trying your luck in the market seems to put you in a poor condition.
Finally, the last trick is you should hedge and speculate with options. Based on the data only a few traders could finally make money. Meanwhile, the vast majority of retail investors face a lot that economists believe that they just do it for gambling. In this case, you could put options. In other words, it could be putting spreads. This is for those buying after the bear market. The function of it could lead to the use of a hedge long position.