When assessing bear market risk, it’s important to cut through the taboo that surrounds them. Yes, bear markets are painful. But they are also rare, and over relatively quickly. Since 1945, stocks have spent about two-thirds of the time at or within 10% of an all-time high. In this light, it’s clear that markets behave more like a runaway train than a cycle or clock when viewed over the long term. As an investor, your job is to try to keep up with the train, which rarely stops and never truly goes backwards. This context is noteworthy as you ask yourself how much long-term growth you’re willing to forfeit in order to improve your comfort level during the painful-but-rare pauses.
Before the bear shows up
Unfortunately, history tells us that the quest for the perfect hedge may be a wild goose chase. No matter how well-intended or designed, the strategies that provide the most potent protection against equity downside risk also tend to be the most costly as they sacrifice long-term growth potential.
We typically recommend prioritizing cost-effective protection before moving on to less-reliable or costlier hedging strategies. Below are four “damage mitigation” strategies, in declining order of efficiency.