Bear market investing

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11. Cash

It is sometimes said that in a bear market 'cash is king'.

One advantage that private investors have over big institutions is that they do not have to be fully invested in the market. They can keep their money in cash if they want. Institutional funds can keep some of their money in cash, but not for long - they have to be out there looking for returns, which means being invested in the markets.

Also - big investors find it hard to move in and out of the market without prices moving against them. Private investors do not usually have this problem unless they are dealing in very small stocks.

The problem with keeping a high level of cash balances, however, is that interest rates generally fall in a bear market. This reduces the return produced by cash holdings and increases the pressure on investors to find an alternative home for the money.

How much cash you wish to keep in reserve may depend on your appetite for risk (or lack of it). In tough economic times it is always worthwhile giving priority to reducing outstanding debts, and stepping up the amount you have put on one side for contingencies such as redundancy or unemployment.

Let's assume, however, that you have sufficient cash to cover these eventualities and an amount left over you are prepared to commit to the market.

There are several basic rules that may be considered:

• Don't be afraid to maintain a substantial part of your investments in cash if the market mood darkens. It gives you time to think.
• Make sure the cash you have on the sidelines is earning the maximum rate of interest possible.
• Remember that bear market rallies can be sharp. Participate in them if you wish, but be prepared to switch quickly back into cash as they falter.
• Invest only in large, easily traded stocks. Stocks that you can sell if you need to.
• Avoid companies that have had one profit warning (a second is often around the corner).
• If in doubt - stay out.

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