Bear market investing

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7. Bear market investment options: the asset classes

Always remember that there are a number of places you can invest your money - you don't have to be fully invested in stocks at all times, and you may consider adapting your portfolio to changing circumstances. Your main choices of asset class are:

• Shares in big companies, especially major index constituents
• Shares in small companies
• Bonds, especially government bonds
• Physical assets such as gold or property
• Cash accounts

Each of these investment categories has different risk and return characteristics and the normal rules apply: the lower the risk, the lower the potential return; the higher the risk, the higher the potential return.

But the assets also behave in different ways in different economic conditions. In a bear market some will have a tendency to fall, but fall less than the market. Others may hold their value, or increase as shares fall.

We'll look at these characteristics on the following pages. At this stage, the point to grasp is that when markets undergo a change of sentiment - from bull to bear, or vice versa - you must take a long hard look at where your money is invested, and make sure that the assets you own give you a balance of risk and return that you are comfortable with.

Generally speaking, the risk/return profile of the assets above is as follows:

• Shares in big companies - moderate risk and return (if carefully selected)
• Small company shares - higher risk and return (even if carefully picked)
• Government bonds - moderate-low return and limited risk
• Physical assets - stores of value but no income return
• Cash accounts - low return and no risk (other than erosion by inflation)

Investors differ in the degree to which they are prepared to tolerate risk. Before deciding how to plan your bear market investing, it's important to be realistic about the time horizons you have, and to reconcile the returns you want to make with the risk level you are prepared to accept.

1. A word on bears 2. What is a bear market? 3. Why do bear markets happen? 4. How to spot the appearance of a bear market 5. How bear markets end 6. Bear market investment options: timing the market 7. Bear market investment options: the asset classes 8. Stocks: blue chips vs small caps 9. Bonds 10. Property and gold 11. Cash 12. Stocks: general principles 13. Bear-proofing - low 'beta' stocks 14. Bear-proofing - high yield shares 15. Bear-proofing - sectors that historically do well in bear markets 16. Bear-proofing - sectors that historically do badly in bear markets 17. Bear-proofing - key ratios for selecting stocks 18. Bear-proofing - investing in stocks you know and can support 19. Bear-proofing - pound cost averaging 20. Recognising the revival - a check list 21. Conclusion

• The Bear Book
• Stan Weinstein's Secrets for Profiting in Bull and Bear Markets
• The Great Crash, 1929