Image Source: Pexels

With all the news coverage on the current "bear market," you might be feeling a bit uncertain about your next move as an investor. And if you're watching the stock market's volatility in response to this coverage, this feeling may be amplified. Despite the unpredictable nature of the current economic climate, though, there are ways to protect your investments.

Like any other market trend, the shift into a bear market is never a permanent one. Historically, bear markets have lasted anywhere from one month to two and a half years. However, trading doesn’t simply freeze during that period. During my time working as an investment analyst through two recessions, I have seen a few useful strategies that can help you mitigate risk and protect your portfolio during this bear market.
 

1. Move a portion of your portfolio allocation into cash

For this specific bear market, both stocks and bonds are declining in value. At the same time, your portfolio’s volatility is much higher than it would be in different market conditions. One way to reduce your portfolio’s overall volatility is by moving some of your allocation into cash. 

Shifting a portion of your portfolio allocation — say, 15-25% — will also allow you to “buy the dip”: during the bear market, certain stocks become undervalued and trade far below their intrinsic value. With available cash, you can take advantage of these lower-priced stocks.
 

2. Consider investing in commodities 

In a best-case scenario, that the federal reserve is able to control inflation after a handful of recent hikes in interest rates. In this situation, inflation will begin to slow, and perhaps even drop. However, if the federal reserve is unable to control inflation, this may lead to additional interest rate hikes. Ultimately, this causes the long-term interest rate expectation to go up, and bonds and stocks perform purely.

One asset class that tends to rise in value alongside inflation, though, is commodities. Investing in these assets — such as precious metals, energy, and base metals like copper and zinc — will allow you to benefit from increased inflation. I will point out that commodities are typically a hard asset class to invest in, as it requires quite a bit of expertise. 

That said, there are easy ways to begin investing in commodities, such as through exchange-traded funds (ETFs). Some examples of commodities-based ETFs include GLD, SLV, or USO (gold, silver, and the United States Oil Fund, respectively). Alternatively, investors can purchase shares in the companies producing these commodities, such as GDX, Vance Gold Miners, or Global X Silver Miners (SIL). 

Due to the high volatility of commodity prices, I tend to advise investors to only allocate a small portional (e.g. between 10-15%) of their portfolio to commodities.
 

3. Rotate your equity portfolio into quality and low-volatility stocks

There are a few different ways that you, as an investor, can rotate your equity portfolio into quality stocks with lower volatility. Quality stocks refer to companies with high profitability and low financial leverage, while low-volatility stocks are ones that tend to fluctuate less than the broader market.

In a bear market, quality and low-volatility stocks tend to outperform the broader market and companies with less solid fundamentals. You may consider investing in defensive sector stocks, like consumer staples such as Wal-Mart, health care, and utilities. Alternatively, it’s possible to invest in quality, low-volatility stocks through ETFs.  

An example of a quality stocks ETF include the iShares MSCI USA Quality Factor ETF (QUAL). As for a low-volatility example, one option investors can consider is the Invesco S&P500 Low Volatility ETF (SPLV). 

While bear markets can evoke feelings of uncertainty, they don’t mean you must stop trading entirely. Rather, it’s an opportunity to reevaluate your strategy. By evaluating your risk, paying attention to bellwether stocks, and strategically diversifying your investments, you can minimize losses and set yourself up for a better position for when the market rebounds.