The end of the bull market is upon us. Or maybe it’s really close. Getting closer? Nobody really has a clue on the timing, of course. The only thing we do know for sure is that the fun has to end eventually.
The important question: Will you be prepared for it?
There’s the standard advice you’d hear from any number of standard-issue financial advisors: Stay the course. Craft a plan and stick to it. Eye the long term and ignore the day-to-day fluctuations.
Sound advice, sure. But what if you want to do more than just survive the next bear market? Sam Dogen of the Financial Samurai blog is here to help.
“Realistically, my target scenario during a recession is to stay flat,” he wrote in a post on Monday. “But my blue-sky scenario is to actually try and make lots of money as the world collapses all around.”
Here are some of his tips to achieve just that:
Be OK with no longer making money
In order to avoid the deep losses, you have to unload risk assets the deeper we go into the bullish cycle. And with that, you have to be mentally prepared to overcome intense FOMO (fear of missing out). If you’ve sold Amazon AMZN, +0.46% anytime, well, ever, you know the feeling. As Dogen says, “missing out on gains is the only way to not lose money.”
Be at least neutral when the cycle turns
A recession before the end of 2020 is a likely scenario, Dogen warns, so consider getting at least somewhat liquid before that time comes. “Remember, even if you move to 100% cash USD, +0.59% or CDs, you are still going to make a guaranteed ~3% on your money each year based on today’s risk-free rate,” he wrote. Might not sound like much, but when the alternative is double-digit declines, it’s a relative windfall.
Take some risk and go net short
If you want to make a lot of money in the downturn, you’ll have to ramp up risk. One of the easiest ways to achieve this is to buy ETFs that profit from market declines — less risky than trying to identify individual companies, but still enough to goose portfolios during selloffs. Dogen posted this list from ProShares as a starting point:
Go long volatility
We’ve seen what the VIX VIX, -2.02% is capable of doing to a portfolio. Earlier this year, when the slumbering stock market woke up and got slammed, the VXX VXX, -0.65% doubled as the S&P 500 SPX, +0.18% shed 10%. Due to the structure of the investment, VXX is a losing bet over long periods of time, but as a short-term hedge or a quick grab for profits, it can be useful.
Go long U.S. Treasurys
“When the world is collapsing, investors tend to seek the safety of U.S. Treasury bonds,” Dogen said, pointing to two typical ways to gain exposure: The iShares 7-10 Year Treasury Bond ETF IEF, -0.09% and the iShares 20+ Year Treasury Bond ETF TLT, -0.14% “Buying TLT will give you more upside and volatility given longer duration bonds are more sensitive to interest-rate changes,” he said. “It’s interesting to note that even if you had bought TLT at its high during the crisis, you’re back to even today while earning a steady ~3% annual yield.”
Go long gold
As the doom-and-gloom set’s most-hyped risk-off asset, this one is a rather obvious choice. “Gold is an imperfect hedge,” Dogen said, but it has a history of rallying nicely during the downturns. One of the most popular ways for the average investor to gain exposure to the shiny stuff is to buy the SPDR Gold Shares ETF GLD, -0.29% GLD, -0.29% .
Go long yourself
Dogen, who went back to business school to help him reach his dream of an early retirement, says making yourself a more valuable asset is always a smart choice. “The people who don’t lose their jobs in a recession are those who are too valuable to their firms,” he said. “Therefore, build enough skills, client relationships and internal goodwill to be forever employed. You are likely your largest money maker.”
No sign of the bull dying just yet. The Dow DJIA, -0.01% was down fractionally Tuesday after logging gains in the prior session. The S&P SPX, +0.18% and Nasdaq COMP, +0.52% , meanwhile, were both in the green.