Building A Portfolio In A Bear Market

No Place To Hide

A massive amount of portfolio wealth has been destroyed throughout this bear market that continues its carnage that started in January. Except for oil stocks, there hasn't been any place to hide, as the cryptocurrency market, gold, equities, and bonds have all scummed to the mauling of the bear. The current bear market has been brutal, with some individual stocks losing more than 90% of their value, such as Peloton (PTON), Beyond Meat (BYND), Coinbase (COIN), and Zoom Video (ZM). However, even high-quality large-cap companies with growing revenues and durable business models have not been spared and have sold off 30-50%, such as Disney (DIS), Microsoft (MSFT), Adobe (ADBE), Costco (COST), and Meta (FB).

During bear markets or an extended period of a market-wide correction, investors have the unique opportunity to purchase heavily discounted stocks at a fraction of the price compared to their peaks. As history indicates, establishing long-term positions during corrections can lead to outsized gains over the intermediate and long term. As the selling pressure abates and the macroeconomic backdrop resolves, building equity stakes in high-quality companies bodes well for investors. The most recent market-wide sell-off is due to a confluence of the China Covid lockdowns, the Russia/Ukraine war, persistent inflation, and rising rates. As these macro issues resolve over time, the markets will regain their footing and appreciate higher. The current market backdrop is the exact scenario where investors should be deploying cash on hand to snap up heavily discounted merchandise.

Cash Is King

Deploying cash into an environment where the selling is relentless and indiscriminate can be a daunting task. However, for any portfolio structure, having cash on hand is essential and in these environments is where this cash should be deployed in equities. This cash position provides investors with flexibility and agility when faced with market corrections. Cash enables investors to be opportunistic and capitalize on stocks that have sold off and have become de-risked. Initiating new positions and dollar cost averaging during these extended periods of weakness are great long-term drivers of portfolio appreciation. Absent any systemic risk; there are a lot of fantastic entry points for many high-quality large cap companies. Investors should not be remiss and capitalize on this buying opportunity because it may not last too long.

Anchoring And Dollar Cost Averaging

Purchasing stocks at the exact bottom is nearly impossible; however, purchasing stocks at attractive valuations in a disciplined manner over time is possible. For example, dollar cost averaging is a great strategy when anchoring down into a position with an initial sum of capital and following through with additional incremental purchases as the stock declines further. The net benefit is reducing the average purchase price per share in a sequential fashion (i.e., reducing cost basis). An example of building out a high-quality portfolio with subsequent dollar cost averaging throughput this market weakness can be seen in Figure 1.

Building A Portfolio In A Bear Market
Figure 1 – Initiating positions in high-quality companies with subsequent dollar cost averaging to lower the average purchase price over time. These long equity trades along with options-based trades can be found via the Trade Notification service

Conclusion

Purchasing stocks at the exact bottom is nearly impossible; however, purchasing stocks at attractive valuations in a disciplined manner over time is possible. During bear markets, investors have the unique opportunity to purchase heavily discounted stocks at a fraction of the price compared to their peaks. As history indicates, establishing long-term positions during corrections can lead to outsized gains over the intermediate and long term. As the selling pressure abates and the macroeconomic backdrop resolves, building equity stakes in high-quality companies bodes well for investors. The current market backdrop is the exact scenario where investors should be deploying cash on hand to snap up heavily discounted merchandise.

Having cash on hand is essential and in this environment is where this cash should be deployed in equities. This cash position provides investors with flexibility and agility when faced with market corrections. Cash enables investors to be opportunistic and capitalize on stocks that have sold off and have become de-risked. Initiating new positions and dollar cost averaging during these extended periods of weakness are great long-term drivers of portfolio appreciation.

Noah Kiedrowski
INO.com Contributor

Disclosure: Stock Options Dad LLC is a Registered Investment Adviser (RIA) firm specializing in options-based services and education. There are no business relationships with any companies mentioned in this article. This article reflects the opinions of the RIA. Any recommendation contained in this article is subject to change at any time. No recommendation is intended to constitute an entire portfolio. The author encourages all investors to conduct their own research and due diligence prior to investing or taking any actions in options trading. Please feel free to comment and provide feedback; the author values all responses. The author is the founder and Managing Member of Stock Options Dad LLC – A Registered Investment Adviser (RIA) firm www.stockoptionsdad.com defining risk, leveraging a minimal amount of capital and maximizing return on investment. For more engaging, short-duration options-based content, visit Stock Options Dad LLC’s YouTube channel. Please direct all inquires to [email protected]. The author holds shares of AAPL, ACN, ADBE, AMD, AMZN, ARKK, AXP, BA, BBY, C, CMG, COST, CRM, DIA, DIS, EW, FB, FDX, FXI, GOOGL, GS, HD, HON, IBB, INTC, IWM, JPM, LULU, MA, MS, MSFT, NKE, NVDA, PYPL, QCOM, QQQ, SBUX, SPY, SQ, TMO, UNH and V.

Dollar-Cost Averaging Into The Correction

Relentless Selling

The bears have been circling for months and have now mauled these markets into a correction. The linchpin was inflation along with an impending rising interest rate environment. The simmering geopolitical tensions between Russia and Ukraine only exacerbated this delicate market and pushed it into a full-blown correction. Over a third of the Nasdaq 100 stocks traded off at least 30% from their highs, over half of the S&P 500 fell 15% or more while the median biotech stock had sold off by 60%. Massive amounts of market capitalization have been eviscerated across the board, with many individual stocks selling off 50% or more throughout this downward spiral.

However, during periods of market-wide corrections, investors can purchase heavily discounted stocks at a fraction of the prices these stocks were trading at just weeks prior. As history indicates, establishing positions during corrections can lead to outsized gains over the intermediate-term as the selling pressure abates and the macroeconomic backdrop resolves. Portfolio balance is key in all market environments and deploying cash during periods of heavily reduced valuations is essential. Cash can be used opportunistically for snapping up heavily discounted stocks of high-quality companies via patience and dollar-cost averaging.

Dollar-Cost Averaging

Repurposing Cash

Deploying cash into an environment where the selling is relentless and indiscriminate can be a daunting task. Continue reading "Dollar-Cost Averaging Into The Correction"

Post-Pandemic Gains Negated - Don't Be Remiss

Relentless Selling

For many individual stocks, the post-pandemic gains have not only been negated, but share prices are now lower than pre-pandemic highs. The accommodative monetary policies, Covid related stimulus, asset purchases, and market liquidity are coming to an end. Now, raging inflation, impending interest rate hikes, Federal Reserve tapering, omicron ebb and flow, continued supply chain disruptions, and geopolitical issues have culminated into the current market swoon. The latest market weakness has been persistent over the past few months while being exacerbated in January and February to start 2022. A third of the Nasdaq 100 stocks are off at least 30% from their highs; half of the S&P 500 has fallen 15% or more while the median biotech stock has sold off by 60%. Taking a look at a composite of high-flying growth stocks using the Ark Innovation ETF (ARKK) as a proxy, this cohort is down 60% as well.

The recent multi-month sell-off from November 2021 through mid-February was met with heavy and vicious selling. Valuations have been decimated overall, and cold water has been thrown on investor enthusiasm, especially in the more speculative stocks in cloud software, SPACs, and recent IPOs. The tremendous selling volume has inflicted damage across the board, with whole swaths of the market auto-correlating into a downward spiral. Now many opportunities are presenting themselves as valuations have been greatly reduced. Being too bearish may prove ill-advised over the long term as we're witnessing the 2020 Covid-induced sell-off unfold all over once again. Portfolio balance is key in any environment and deploying the cash portion of one's portfolio during periods of moderating valuations is exactly where this cash can be advantageous. Cash can be used opportunistically for snapping up heavily discounted stocks of high-quality companies during periods of indiscriminate and heavy selling. Continue reading "Post-Pandemic Gains Negated - Don't Be Remiss"

Opportunities Abound - Building Out A Portfolio

The economy is going through a pivotal moment as the Federal Reserve withdrawals stimulus as economic tailwinds may be in jeopardy. The culmination of inflation, supply chain constraints, pandemic backdrop, rising rates, and easy money policies coming to an end has led to some individual stocks losing 30%-80% of their value in a matter of weeks. All the major indices have sold off in a meaningful way and are now in correction territory. Initially, there was a massive sea change in the market out of technology, specifically high beta/richly valued stocks and into value. As a result, the Nasdaq dropped over 15%, Russell 2000 dropped over 20%, S&P 500 dropped over 10%, and the Dow Jones dipped down over 8%.

With many high-quality companies selling at deep discounts, this correction offers an opportunity to build out a portfolio and engage in dollar-cost averaging. It's difficult, if not at all impossible, to time the market and buy at the exact bottom. However, one can initiate a position and add to the position as the stock becomes cheaper when and if the market-wide sell-off deepens. Any portfolio strategy should include a cash portion, and it's times like these where the cash portion should be deployed and put to work.

Earnings Disasters And Indiscriminate Selling

Disappointing earnings have been a linchpin for individual stocks to lose swaths of value while sending entire sectors into a downward spiral. The financials suffered massive selling pressure after JP Morgan (JPM) and Goldman Sachs (GS) reported earnings. Netflix (NFLX) saw its stock tank over 25% after reporting earnings, and this reverberated through the streaming space to sink Disney (DIS) too. Continue reading "Opportunities Abound - Building Out A Portfolio"