Don't Worry About A Bear Market, Plan For It Instead

Fears about a potential trade war between the U.S. and China are creating lots of concern among investors lately. It’s hard to tell if this will be a major economic headwind or just a reasonable renegotiation of trade agreements between the two superpowers. In any case, markets hate uncertainty, and trade war fears are an important uncertainty driver.

Looking beyond the short-term outlook, it’s important to note that a bear market is coming sooner or later. Nobody knows for certain when it’s coming or how deep it will be, but that’s just the nature of markets. You can’t expect to enjoy the upside potential in stocks unless you also are willing to accept some downside risk from time to time. Even worse, bear markets usually show their ugly face when least expected.

Bear markets are practically impossible to predict with precision, but the good news is that you don’t really need a crystal ball to protect your portfolio when the bear market comes. Please note that the key word is “when” the bear market comes, not "if."

As opposed to making market predictions, relying on objectively quantified variables with a solid track record of performance is a far sounder approach to protecting your capital through the ups and downs in the markets.

The following paragraphs will introduce a quantitative system designed to increase returns and reduce downside risk by relying on a combination of stock-specific factors and trend-following in the broad market. No system is perfect or infalible, but the statistical evidence indicates that a well-designed quantitative system can be a remarkably effective tool to incorporate in your investing toolbox.

Stock Picking Based On Quantitative Factors

The following quantitative system applies the PowerFactors ranking algorithm to companies in the Russell 3000 Index. PowerFactors is a stock picking algorithm exclusively available to members in my research service: The Data Driven Investor. The system basically selects companies based on four main factors: quality, value, financial momentum, and relative strength.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: I wrote this article myself, and it expresses my ...

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