The bear market is a dreaded event in the financial markets and as much as possible, investors want to be protected from it. Here are some of the most useful assets that can help safeguard your portfolio from the bite of the bear market.
One of the most common ways to balance your portfolio during a bear market is through dividend stocks. When you have a dividend stock, you will receive a taxable payment from the company’s board of directors. The payment comes from the company’s current or retained earnings, given usually at a quarterly basis.
The dividends are mainly in cash, but they can also come in the form of stock. In general, dividends are used by stable companies to incentivize their investors for investing in the company.
When looking for dividend stocks, you must root for companies that have a history of paying a steady, uninterrupted dividend over many years. Most companies that have consistently paid dividends over the years are usually committed to continuing the achievement.
And we say achievement because being able to do that requires cash from the company. So when a company pays dividends, it means that the company has a strong financial strength.
Another way is through investing in preferred stocks, which typically pays a fixed dividend before any dividends are paid to common stockholders. In case the company goes out of business or needs to liquidate, they present partial ownership in the company and will receive priority over common stockholders but after bondholders.
Owners of preferred stocks do not benefit from the same voting rights as common stockholders. The advantages of owning preferred shares, on the other hand, include a greater claim on the company’s assets and having a higher priority status when it comes to receiving dividends.
There are four types of preferred stocks:
- Cumulative Shares – these shares provide dividends that build up if the company does not make the dividend payments as promised. Most preferred stocks are cumulative shares.
- Non-cumulative shares – as the name suggests, these stocks do not allow unpaid dividends to build up.
- Participating preferred shares – these stocks provide regular dividend as well as enable owners to participate with common stockholders in extra dividends.
- Convertible shares – you can exchange these shares for other types of security, such as common stocks.
Fixed Income Assets
You can also invest in other fixed income assets if you want to fight the bear market. Here are two of the most common fixed-income assets you can use.
Certificates of Deposit
A certificate of deposit (CD) is a savings certificate that has a stated maturity date, interest rate, and can be issued at any price. Commercial banks usually issue them, and these CDs are insured by the Federal Deposit Insurance Corporation (FCIC).
In general, if you withdraw funds ahead of the maturity date, you will usually have to shoulders some penalty. These are not tied to the stock market and can be used to provide your portfolio with stability.
A bond is also a fixed income asset that is given by governments, corporations, and other large organizations. They pay interest on regular periods and principal upon specified maturity date. When you buy a bond, you become a creditor and you will not be entitled to any type of ownership rights.
In case the company goes bankrupt, you as a bond investor have claim to the organization’s income and assets.