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The Next Bear Market: How To Prepare Now



  • We discuss the current market scenario.
  • We also discuss how to deal with high volatility that we have witnessed since February of this year.
  • As investors, while we hope for the best, we need to be prepared for the worst.
  • Last but not the least, we construct a portfolio that is income-producing, diversified, and ready to withstand a bear market when there is one.

To be clear, we are not declaring the current bull market dead. We do not have any illusions of knowing which way the market is headed. However, fortunately, to be successful in investing, we do not need to be able to predict the market direction. Since the average duration of a bear market is much shorter than the average duration of a bull market, our aim should be to thrive in the bull markets and avoid getting hurt in the bear markets.

The current bull market has completed nine years this week and heading into the 10th year. At some point, this will turn into a bear market, just like every bear market is followed by a bull market. As investors, we need to be prepared for the worst, while we hope for the best.

The Volatility Is Back

The stock market volatility has come roaring back since the beginning of February 2018. The markets have been worried over the fact that even though inflation is still low, it has been inching up. The interest rates have been gradually rising and likely to rise even further with Fed announcing its intention to increase rates by a quarter point at least three or four times in 2018. More recently, it has been throwing fits over the possibility of a trade war.

Even though the market indexes recovered nicely after a 10% correction in early February, but in a way, we are not out of the woods yet. It is quite possible that markets may retest the February lows. However, it does not necessarily mean that we are headed towards a bear market. It just means that the volatility is likely to remain high until the market is finally able to shake off its new set of worries. If we were to make a guess, we think the current bull market

This article was written by

Financially Free Investor is a financial writer with 25 years investment experience. He focuses on investing in dividend-growing stocks with a long-term horizon. He applies a unique 3-basket investment approach that aims for 30% lower drawdowns, 6% current income, and market-beating growth on a long-term basis and he focuses on dividend-growing stocks with a long-term horizon.

He runs the investing group High Income DIY Portfolios which provides vital strategies for portfolio management and asset allocation to help create stable, long-term passive income with sustainable yields. The service includes a total of 10 model portfolios with a range of income targets for varying levels of risk, buy and sell alerts, and live chat. Learn more.

Analyst’s Disclosure: I am/we are long ABT, ABBV, JNJ, PFE, NVS, NVO, CL, CLX, GIS, UL, NSRGY, PG, MON, ADM, MO, PM, KO, DEO, MCD, WMT, WBA, CVS, LOW, CSCO, MSFT, INTC, T, VZ, VTR, CVX, XOM, VLO, HCP, O, OHI, NNN, STAG, STOR, WPC, MAIN, NLY, PCI, PDI, PFF, RFI, RNP, UTF, EVT, FFC, KYN, NMZ, NBB, HQH, JPC, JRI, TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (76)

KingTerry profile picture
Looking on putting on a position in Municipal Bonds today with VanEck Vectors High-Yield Municipal ETF symbol HYD - anyone have any thoughts they'd like to post on Muni's?
why are you not in nrz out of curiosity
RoseNose profile picture
Thank you for the insightful article.
I use portions of the ideas for most all of my portfolio of 94 investments.
In 2016 I started to create that HY basket of stocks.
Glad to see ARCC,NRZ, STAG, OHI, VTR in the mix.
I have some CEF - but not the ones listed, that is okay, as it is a big world in investing.
I give credit to Steve Bavaria for his insightful articles as well- I found him a bit later on.
Wm Hilger was the first to discuss this type of investing and was almost railroaded out of town.
Joe HYI has taken it to another level and shows how it can work over the last 2 years.
He has retired easily and happily doing it. Of course a bull market helps, but like you say many BDC and REITs are now buys...if you have the stomach to do so.
I am finding it works for those types.
I do some options.
Thank you again and best wishes- along with Happy Investing :))Rose
RoseNose profile picture
PS. The Fortune Teller got me started with NRZ, NEWT and others with his A-Team...that was 2016.
He has a service now too, The Wheel of Fortune, like many great authors and investment people.
I hope yours does well too.
Thanks again.
Very informative article. Thank you.
KingTerry profile picture
I’ve been doing this type of methodology for almost 2 years with 10 monthly paying divs (CEFs, ETN’s & ETF’s) all at 7% or higher & leaving 50% in cash for any dips. I also sell strangle options on the fang stocks. As a retiree I can tell you my biggest challenge is keeping my head when major volatility/pull backs occur & BUYING on the dips. It’s now 10% mechanical & 90% mental. Having the cash on hand & pulling the trigger is key. With N Korea, interest rates & of course Trump its a challenge! Great article and right on the money. Thank you.
Very nice! Would love to know what positions you have as I am trying to build a similar portfolio for high yield and looking for somewhat safe CEFS, ETN’S & ETF’S with 7% or higher yield. Would you mind sharing? Thanks so much in advance and wish you the best of luck, great returns and a relaxing retirement! :)
very interesting. thank you.
astro24102 profile picture
Very insightful article. In a perfect world, you would never have to draw down on the principle. Just live off dividends. The strategies in the article may convince me to tweet my plan a bit.
This is a sound article. But there is an easy way for those who have other sources of income such as pension, social security. They should put the money in dividend stocks and use the monthly dividend earned to complement the pension, social security. This way, you do not have to worry about price drop, sector rotation, recession, inflation, depression, market drop, etc. Just visit you account at the end of month and request draw of dividend earned for the month and do nothing else. Your money will last for ever. But do not involve in dividend reinvesting because this will make you greedy and that in turn with depress you when your stock drops. So just take the dividend and use it to complement your living expenses. I have been doing that happily for some years. Remember all of us have a finite life span and it does not make much sense to build a mountain of money when we will not be able to use that. Also think that not all of us can become Bozos, Gates, Buffett, etc. When Bozos leave, his Amazon will remain here. He came empty handed and leaves empty handed. That happened with Jobs and others. It will happen with all of us.
Sanjay John profile picture
Wise words. Thanks.
The only problem is that dividends are cut down-even stable sectors like REITs and Utilities cut dividends once in a while. So I guess you have to learn to live on the 2% SPY dividend? Too little...I think you really have to learn to sell some part of your portfolio regularly, the same dollar cost averaging done in reverse-so that periodically you keep selling some stocks and not worry about market gyrations-which will give you the average price appreciation of the stock market in your selling years.
Joseph Oppenheim Investing profile picture
Well, I take a different approach.....I see myself as a businessman, owning stocks of companies which I’d like to own completely (great companies) if I could and thus return a yearly increasing income (dividends).....also, companies which provide products or services always needed (good times or bad)....that’s my major way of stock diversification.

That approach has guided me to a 19 stock DGI portfolio (almost all Dividend Kings and Aristocrats), but just about 30% of my assets, in order to be flexible and diversified enough to react to most any situation which arises.....a conservative approach, not looking to beat any popular indexes, just remain financially Independent, as I have been since age 48.....and leave something worthwhile to my beneficiaries.

As for bear stock markets, to me they are just buying opportunities, a different flavor of good times. To me, there are never wrong times to buy quality, just better times.
94Vette profile picture
38 + 135 isn't 178
Financially Free Investor profile picture
Thanks for pointing out. Looks like a typo. Or maybe I was trying to squeeze some extra return here :)
I really appreciate the format of your portfolio suggestions. Also, the options paragraphs were highly informative. I have never done options, but want to, but don’t understand how it is executed. Your explanation increased my comprehension and confidence. I think it get it!

What may be a drawback to CEF’s?
Been doing a little covered call writing in my iras with REITs. That has not gone well with the 10% drop in prices since dec. But with treasuries bouncing a little lately I am a lot closer to break even do to divs & rolling down and out a little on the option selling. I plan to call it a go after exp this coming fri. The cash secured put option might be a good alternative for the q2 coming up. Do you know off hand if the naked puts can be sold in Ira accounts. They would not let me roll down and sell lower call strikes until after I bought back the upper call strikes. So I had to buy back the remaining calls at the same time I sold new calls against the underlying stocks.
I suspect most brokerages wii not allow naked selling of options in retirement vehicles like iras. I don’t know if this is in response to irs rules, or they are protecting themselves.
Fidelity allows cash secured naked put writing in IRAs.
I love the ideas discussed in the article. I was in the process of constructing a fixed income portfolio but stopped when I realized that my advisor was not figuring out how to also protect the portfolio
from risks. He put me into domestic long-term corporate bonds for the high coupon rates and predictable income stream. However, it is I who questioned why are we buying longterm in a rising interest rate world that will only depreciate my NAV over that time. His answer was that I shouldn't care about the capital loss if I am getting dependable income from the coupon interest rates.

I do care about capital loss and feel the old way of thinking is asset allocation into losses and bonds as a diversification tool is changing.

We are in a much more volatile investment environment where protection of capital and growth are the order of the day. 2017 did not test financial advisors. 2018 will be the year that separates the mere sellers of financial products from the true strategists.

What advice do have for a 63.5 year old who is seeking alpha and a smart plan.

Seeking smart.
BlueSkyForever profile picture
Really liked this article, as it shows how an investor should structure their portfolios. As a 60 year old, these weren't the issues that concerned me back when I was in my 20's. Looking back, sure wish I'd been investing a lot more $. And paying more attention to how our money was being invested every month, not just in 401k plans. If we had placed more emphasis on putting $ into the stock market, our net worth would be greater. My husband & I have done well, but the missed opportunities are there. I'm sure some of us wish we had bought as much AMZN, NFLX, BKNG, etc. plus more of the great companies like WMT, MCD, PEP, etc. over the years.

So after decades of saving, and paying into 401k plans, I now manage all the investments myself. No more mutual funds & bonds. We rolled over all our 401k plans a decade ago. The money is now invested in blue chip type companies (roughly 45 %) like MCD, WMT, JNJ, MMM, HD, HON, NOC, LMT, AAPL, MSFT, INTC, CSCO, V, UNP, BMY, ACN, TRV, BAC, JPM, T etc. For higher dividends, BDCs, CEFs, & REITs (about 30 %) OHI, MAIN, DOC, NRZ, NEWT, PTY, PTD, HPT, STWD, WPC, SKT. Growth companies ( about 15 %) AVGO, FB, STZ, AMZN, GOOGL, ATVI, SWKS, CRM, BKNG. Also, some companies like CELG, AMGN, REGN, AGN, MYL, SBUX that don't quite fit into a definite group. A few more speculative plays, like UNIT, that is closely watched. My recent purchase of UNIT is doing okay now, but is something I would sell immediately if the price starts falling.

Over all, there are about 80 stocks, spread over 5 portfolios. A lot to manage, but it's my full time job now. The best companies don't need a lot of tending, they take care of themselves. The reason for owning so many stocks is to spread the risk. Some are less than a 0.5% position, others have grown beyond their original 2 % position. I am a buy & hold (until it makes sense to sell) type of investor. Over time, holding companies like V, BKNG, MCD, WMT, HD, AMZN, NOC, MMM, AAPL has made sense. The truly great companies get better over time, well rewarding an investor that holds them for decade after decade, re-investing dividends along the way.

I use the monthly dividends, paid in cash, to buy more shares of the companies that look value priced. As a hedge, a cash position of around 5 - 10 % allows me to take advantage of any future bargains. Yearly dividends are now over $70,000. The dividends are going to help pay costs during retirement, along with social security. We do not have any pensions.

Owning some growth companies has allowed my investments to really perform. Some may think it's too late, but there are many growth companies to choose from. ATVI & AVGO are recent buys for me, bought during the February big dip we had. Any time the market drops, that is an opportunity to buy great companies "on sale." Priceline, now called Bookings was first purchased when it was just under $1,000. It has now gone over $2,000 a share. Always having cash ready to invest helps me take advantage of the market. I would rather keep buying monthly, perhaps on the way down - but also on the way up - then forever waiting for the really big dip. Over time, as your investments start compounding, their value will solidify & your dividend income will increase. So if we do get into another recession, I always have fresh cash coming in monthly to take advantage of lower stock prices.

During the last big market opportunity, from 2008 - 2009, I never sold anything but kept buying, re-investing dividends every month. Since that time, our overall investments have increased 4 times. Could we see another 50% decline? Of course, that's a possibility. Being invested in companies that will not go broke, and will keep paying dividends, means you will have cash coming in to buy those cheaper shares, and eventually, your stocks will go back to the same value ( or higher ). Having some cash on hand helps too, and always keep enough cash, to pay living expenses, that is not invested in stocks. I like at least one year, or more, of living expenses kept in my emergency fund. This could be kept in short term treasuries, as well as some actual cash.

There is no one unique way to invest. Knowing yourself, and how your investments work for you, can help keep you from getting frustrated. Patience is key, buying when a company is undervalued is important, and buying the best companies & holding them long term, has all worked for me.
Now you are already getting $70k. You have made it. So it is time to spend that.
Financially Free Investor profile picture
Hi BlueSky - Thank you for the kind words. Your comment is very insightful as well. Also, congratulations on success with your investing. All the best.
Market Map profile picture
Over the last 50+ years, significant decline events have been rare and have accompanied a negative reading in the vector based calculation of the Leading Economic Index ( Chapter 1, parts 1 & 2 * ). Since 1970, the average correction when the vector based calculation of the Leading Index of Economic indicators was positive has been - 8 % ( on a monthly close basis , chapter 5, Part 1, charts 6 & 7 * ). The LEI encompasses many components with useful correlation to the trend of the equity market. Additionally, the Time series variable has signaled a "positive" output value ( chapter 7, part 2, charts 1 & 4 ).
Having a large "breadth" of sample size and a long investment horizon on one's side, can provide decent perspective in seeing the "big picture".
. . . .
* tinyurl.com/y8d33264 ( paste link into browser address bar )
juanabe1 profile picture
EXCELLENT advice regarding how to, and the need to, develop a strategy unique to your individual risk tolerance. That makes it easier to follow and not panic in times of volatility. Very important to "know thyself". It took me a while to learn that. Newer investors would be wise to come to that conclusion early.
Gilariverman profile picture
Great article, I would suggest adding midstream pipe MLP”s to your high income mix. They are backed by hard assets in the ground, that are often very difficult, if possible, to replace (e.g. Williams’ Transco pipeline running through D.C.and NYC.
Financially Free Investor profile picture
Thanks. I have the MLP closed-end fund (KYN). I was trying to avoid the partnerships because of their K1 tax complexity. But you right, some of them are great investments. All the best.
Well . late stage cycle we could still see significant upside, therefore be prepared to see your stock called away fairly quickly.
Financially Free Investor profile picture
Agree 100%. That's why the options bucket is only one part of the portfolio and the only objective is to generate 10% or more income. Sure, this is not for everyone. Also, the rest of the buckets will benefit along with the market. Thanks for reading and commenting.
Retired in Costa Rica profile picture
Financially Free Investor,

"...the options bucket is only one part of the portfolio and the only objective is to generate 10% or more income."

This is very realistic and I just use the same stocks that are in my DGI bucket. For me, this portfolio has generated 150% more income compared to the current yield of the DGI portfolio of just dividends (10% v. 4%). What has surprised me is that it has also grown the capital slightly more in comparison in the last few years.
Clauser1960 profile picture
I suggest youl just one bucket: Spy, and maybe add Sphd. You save yourself a lot of time, money and ....buckets.
Financially Free Investor profile picture
Sure, that's not a bad advice for the most passive investors. Thanks for reading.
Gilariverman profile picture
Clauser, there is much wisdom in your suggestion!
Gilariverman profile picture
Clauser, the earlier one starts in life with your recommendation, the better. If you were to start at 22 years of age, and only invest in one thing - SPY - and stick with it, you will likely be in the top 5% of serious investors over your lifetime. Buy steady and never sell until retirement and you will likely be very successful, barring extreme socialism or communism. If those become very prevalent, I suggest running for your life, or at least a good place to bury gold.
Stockles profile picture
Great article, but would love to see a bit more focus for young DGI's (investors). It's always about retirees, which is okey since that's the majority of the users here on SA, but would love more for the younger people with lot's of time.
Stockles profile picture
Also interesting in knowing why you put at&t in the DGI portfolio. With just 2%eps growth (CAGR) it isn't really a good DGI stock (however, dividend will grow, but very slow)
I’ll share. I’m 34 and consider myself a long term dividend growth investor but am also in the accumulation stage. My portfolio is 50% index, 30% DG, and 20% momentum rotation similar to the author description.

My DG portion is DGRO and 12 low dividend stocks that I expect will be my core for many years to come. Think AAPL, V, DIS, UNH.

The momentum rotation strategy uses a 3 month performance indicator same as above. I instead look globally and look at bigger sectors. Think large and small cap value and growth, emerging markets, developed market small cap.

My target is to retire in 20 years. As I move closer to that date I expect that DG and momentum will be a larger weighting for income and protection in major market events like 2008.

I save in a 401k, Roth, hsa, and taxable account. Never have more than 5% cash. Have an emergency savings to cover short term needs.

Don’t know if it is right or not but feel good about my plan.
Financially Free Investor profile picture
Hi Stockles - Thank you for reading. The DGI portfolio is a mix of stocks with high current yield with less growth (example AT&T) as well as some others with low starting yield but high growth (example MA). That ensures that we get decent overall yield (upwards of 3%) as well as some growth in future. All the best.
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