It’s one thing to worry about when the bull market in stocks will end. It’s another thing to really think about it and prepare for it. This article is an in-depth review of why people need to prepare for bear markets and the many options you have for setting your portfolio for bad times.
As any investor who’s had money in the market for a while knows, it can be incredibly painful to watch your portfolio balance being gutted each month during a bear market. Seeing significant losses affects our psyche, and oftentimes leads us to make foolish investing decisions.
In bull markets, we like to think that we’re somehow smarter than average, or more in control of our emotions, but when we’re awash in a sea of red, our rational mindset tends to crumble…fast.
So when we look at any market strategy, it’s important to investigate not just the longer-term average returns, but certain measures of volatility – specifically, the standard deviation and the max drawdown (MaxDD). After all, what good is a fantastic longer-term average return, if you sold at the low point of a drawdown because you couldn’t handle it?