Are you sitting in cash after the bear market of 2022?
If you’re still stuck on the sidelines, don’t feel bad. You did better than most investors who were caught up in the worst selloff since 2008.
But you might be looking at the market’s rebound… and itching to get back into action.
While this market is still very dangerous… following two simple tactics will help you get back into the game while limiting your downside risk.
1. Stick with quality
The global fight against inflation isn’t over.
Put simply, central bankers around the globe have no choice but to continue their 2022 policies. In other words, investors should expect interest rates to stay “higher for longer.”
And while higher rates will eventually slow inflation, they’ll result in higher borrowing costs… a likely recession… and a dangerous environment for economically sensitive companies—particularly low-quality companies that rely on debt to finance their operations.
In a recessionary market, it’s best to focus on higher-quality companies—the kind that generate enough revenue to cover their operational expenses.
One way to assess a company’s quality is by checking its credit rating.
Strictly speaking, these ratings are about a company’s corporate debt, not about its stock.
In other words, credit agencies won’t tell you if they think a stock is a buy or a sell… but rather if it’s likely to repay its debt.
The higher the rating, the better.
A higher credit rating means a company will pay lower interest on its debt. This is especially important in a tough economy, where many companies struggle with their debt loads. As a result, stocks with higher credit ratings are less likely to crash, even in a recession.
Plus, the company will have no trouble borrowing if it runs into any unexpected problems… giving it a competitive advantage vs. its lower-rated peers.
2. Invest in insurance
Similar to life insurance, portfolio insurance protects an investor against an adverse event.
One time-tested way to build portfolio insurance is with put options…
Owning a put option gives you the right, but not the obligation, to sell a specific stock or ETF at a specific (strike) price before a certain date (expiration).
All else equal, the value of a put option will move higher when the price of the underlying stock moves lower.
In other words, if you own a put on a specific security, you’re positioned to benefit from a decline in the security’s value… And the faster and sharper that decline, the more you can potentially make on your put trade.
Just like insurance, buying a put costs money…
But this initial cost (think of it as an insurance premium) is the maximum you can lose if the underlying asset is healthier than you thought (and doesn’t decline below your strike price by expiration).
And like insurance, it pays when things take a turn for the worse (in this case, for the underlying asset).
During the bear market of 2022, the Moneyflow Trader portfolio locked in 18 winners for gains as high as 271% using this exact strategy.
In this market, you should be prepared for a downturn. But that doesn’t mean you have to sit on your hands.
By following the two strategies I outlined above, you’ll be able to put cash back to work in the market… benefit from the potential upside in 2023 and beyond… and cushion your downside by booking gains (on put options) when the market drops.
It’s a sure-fire way to help you sleep soundly at night… even in a dangerous market.