Strategies for a Secular bear Market – Part 4

This week we complete this series of blog articles with the much awaited strategies for investing during a secular bear market. Let’s get straight into them.

Suggested strategies for a secular bear market:

1. Low to medium effort, medium knowledge, medium skill: An equities and cash strategy that has a medium term timing element. This is SPA3. The strategy goes 100% into cash during medium term down markets and is 100% exposed to equities during medium term rising markets.
   
   Such a strategy with a demonstrated edge will far outperform the market, cash and managed funds of all types over the medium to long term in secular bull and bear markets. It sets up to take advantage of juicy up swings that occur during a secular bear market whilst stepping aside during down swings thereby avoiding the potential large market correction such as occurred in 2008.
2. Low effort, low to medium knowledge, low to medium skill: Leaning towards a longer term hold period for each position, defensive large capitalisation stocks in Health, Utilities and Consumer Staples.
   
   If you have the tools and time then using this strategy you can find better opportunities that have some capital growth upside such as those I covered in a recent eUGM in June with customers and on Peter Switzer’s TV program a couple of weeks ago on Foxtel Channel 602.
   
   Adding a tactical timing element to this strategy to move mostly or totally into cash is recommended to protect capital in the event of a similar future occurrence as the 2008 bear market.
3. Medium to high effort, medium to high knowledge, higher skill: An equities and cash strategy that has a medium term timing element on international equities, that is, an off shore exchange to the one that is your ‘home’ exchange.
   
   This strategy would use the same approach as strategy 1 above but will carry an additional risk / opportunity of currency. Hence the higher skill and knowledge requirement.
4. Low effort, medium knowledge, medium skill: Longer term timing of large cap equities and equities that meet minimum fundamental criteria.
   
   Adding a tactical timing element to this strategy to move mostly or totally into cash is recommended to protect capital in the event of a similar future occurrence as the 2008 bear market.
5. Low to medium effort, medium knowledge, medium skill: ETF rotational strategy of index, commodity and/or sector ETFs. Such a strategy would be based on utilising relative strength analysis and include inverse ETFs to take advantage of rising and falling markets.
   
   As most of the ETFs that one would invest in are traded on USA exchanges (some are traded in Europe and a few in Australia), this strategy would also involve currency risk / opportunity.
6. Medium effort, high knowledge, medium to high skill: Covered Call Writing. This involves owning the physical stock and writing out of the money call options against the physical stock on a monthly basis. It is suited to larger capital bases and shouldn’t be used with margin during a secular bear market.
   
   It is recommended that buying long dated Put options is also used in this strategy. This combination is known as a Collar. Alternatively, if Put options are deemed too expensive, a tactical timing element should be included in the Covered Call strategy to exit positions to protect capital from a 2008 type market event.
   This strategy can be pursued locally or with USA traded equities and indices.
7. High effort, high knowledge, high skill: Timing on a shorter term basis of leveraged instruments – long and short CFDs, ETFs, FX, futures and / or options (ETOs). These are short term trading strategies that could range from intraday to holding positions for a few days and can be used in all market conditions.

Each investor will have their bend and as such it is not suggested that all these strategies be pursued simultaneously but that one of two are chosen at any given time and that the investor hones their skills in those strategies.

In summary, more effort, knowledge and skill is required to prosper in a secular bear market. The pay-off is that the strategies learnt during a secular bear, provided they have an edge, will also work well during a secular bull market and typically get far better returns in both secular market types than low effort buy and hold strategies.

Investing successfully is about more than just the money and as such should be pursued in all market conditions. “A smooth sea never made a skilful mariner.”