Tuesday, March 10, 2009

How to Invest in a Bear Market

Here are some tips to help Invest in a Bear Market:
  1. Diversify. Diversify your investment portfolio. Don't trade just stocks. Try to find more investment avenues. Some of them like Treasury Bills, Exchange Traded Funds, Bonds are nice options which give secure returns with very little risk.
  2. Invest in Blue Chip Stocks. Buy stocks of Blue Chip Companies only. Research all industry sectors and analyze data of companies before you buy. Stick to stocks with good dividend payout history, moderate price to earning ratio and high earnings per share. All these are indicators of good health of the company.
  3. Invest for Short Duration. To minimize risk, invest for short duration not exceeding 3 months. In volatile markets hold stocks only for 3 weeks or so. Try swing trading.
  4. Earn through Option Trading. Options are derivatives which can be used to earn regular income. Option Trading involves several strategies which help you eliminate risk and earn profit. The profit potential depends upon the market situation and the type of strategy used. Writing covered calls (selling options on stocks you own) is one good strategy.
  5. Aim for small returns. Keep a target of earning 3-5% of your invested capital per month. This may sound small but earned consistently adds to 30% return anually.
  6. Invest Small Amounts Regularly. Invest small fixed amounts regularly. This will reduce risk of loosing a large chunk of your capital if you incur loss. Fix 10-20% of your entire capital for investment each month. For example, if you have $30,000 of total capital donot invest more than 10% ie $3000 per month. If you invested the full $30,000 and made a loss of 10% you will loose $3000. But if you invested only $3000 the loss would be much smaller at $300 only. Once your capital grows, the invested amount will grow accordingly at 10%.
Finally, nobody can predict the stock market. There is no investment asset that can give you returns to keep pace with slowdown and inflation. But using your capital wisely and cashing when the time is right will really help in the long run if done consistently. You may like to read the book "The Great Depression Ahead" by Harry S. Dent. 

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