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3 Ways To Invest Defensively During A Bull Market

Photo credit: Eva K.. Licence: CC BY-SA 2.5

I previously wrote an article about bear markets and why we should pay close attention to them, as they throw up numerous investment opportunities for the astute investor. Bull markets are the opposite of bear markets, and they tend to last much longer and make investors feel happy, confident and contented. This can be very dangerous as there are risks which may not be apparent until it becomes too late to react. Therefore, I shall be discussing how to invest defensively to protect your portfolio from debilitating losses.

A bull market can be defined as such (definition provided by Investopedia):-

“A bull market is a financial market of a group of securities in which prices are rising or are expected to rise.”

The key characteristic of a bull market is one of optimism and rising prices, which continue to suck in more and more investors. As valuations continue to climb, danger arises as more investors pile into the market due to fear of missing out on gains. Risk is either ignored or downplayed, and investors may disregard valuations or common-sense knowledge of business fundamentals to get a piece of the action. Here are three things to take note of in order to protect your portfolio.

Choose Strong, Stable Companies

It is important to invest in stable companies with strong balance sheets, and which generate good free cash flows. Though such companies may seem “boring” compared to other companies which boast sexy stories of growth, these are businesses which are the most resilient during a downturn and can help to protect your portfolio from massive losses.

The Importance Of Dividends

Companies which have a history of paying dividends in both good times and bad should be included in one’s portfolio. Aside from us having cash for a rainy day, the constant dividends would also help to ensure our cash is replenished and would not run dry.

Mentally Prepare For Worst-Case Scenarios

Imagine or model out worst-case scenarios to test the effects of a crash or downturn on your portfolio. This helps to prevent complacency and hubris, and also gives a sense of what may happen should the good times come to an abrupt end. The investor can then tweak the portfolio or position it better when bad times arrive.

The Foolish Bottom Line

Bull markets can make an investor feel exuberant and make him take on more risks than he should. Being mindful of the three factors above can ensure your portfolio stays safe even when a downturn strikes.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.