It's easy to declare that volatility brings opportunity, but putting this principle into practice is easier said than done. Yet, with a well-considered plan in place, riding out the market's down cycles can be a breeze, or at least less of an emotional maelstrom.
If you have $10,000 to invest and a bear market strikes (this might be informally defined as a broad-market drawdown of at least 20% from the prior peak), you'll be better off financially and mentally if you prepared for it beforehand.
With that in mind, let's tap into a legendary investor's knowledge base, and then add a smattering of tried-and-true defensive picks, to keep your portfolio going when the going gets tough.
Give your account a Buffett boost
Unlike the S&P 500 and Nasdaq Composite, both of which are market-cap-weighted and heavily influenced by high flyers in the "Magnificent Seven," Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) stock focuses on good value and resilient businesses. And who's better qualified to identify terrific values than the Oracle of Omaha himself, Berkshire Hathaway CEO Warren Buffett?
Granted, Buffett did include Magnificent Seven member Apple in the mix, but Apple's price-to-earnings (P/E) ratio of about 30 isn't outlandishly high among today's tech titans. Besides, it's hard to imagine Apple collapsing under any circumstances, including a bear market in 2023 or 2024.
The point is, Buffett doesn't invest in any slouches or also-rans. Other notable Berkshire holdings include industry heavyweights like Bank of America (with a below-sector average P/E ratio of 8.3) and Kraft Heinz (which trades at a very reasonable 13.1 times its trailing earnings).
You certainly don't have to allocate your entire $10,000 toward Berkshire Hathaway stock, though that's actually not the worst idea in the world. After all, consumers will still use Apple, Bank of America, and Kraft Heinz products/services even during a bear market. Still, if you'd like to diversify beyond Buffett's top holdings, feel free to buy $7,500 worth of Berkshire Hathaway shares and then add five $500 allocations into a handful of other defensive standbys.
A handful of bear-market bets
If you're going to enhance your Buffett-backed holding with a smattering of defensive stocks, it makes sense to stick to established large-cap businesses that produce or sell consumer goods. I screened for stocks that meet these criteria and then insisted that they pay a minimum annual dividend yield of 2%. That way, you can at least collect some sweet distributions even when the economy sours.
With those filters, I narrowed down my list for $500-apiece allocations to Albertsons(NYSE: ACI) (11.1 P/E ratio, 2.04% forward annual dividend yield), Target(NYSE: TGT) (16.4, 3.53%), Archer-Daniels-Midland(NYSE: ADM) (10.6, 2.21%), Campbell Soup(NYSE: CPB) (14.9, 3.44%), and General Mills(NYSE: GIS) (15.3, 3.36%).These might not be among Berkshire's holdings at the moment, but they at least have the Buffett-approved features of reasonable valuations and income-generating opportunities for investors.
Perhaps best of all, these are all relatively low-volatility stocks. This should be a priority when the financial markets get turbulent since high flyers in bull markets can be deep divers when the bears take control.
Finally, even if they're low-beta, expect all of these stocks to decline during a bear market. Since these stocks are all time-tested through good times and bad, just let the market churn through its ups and downs. And if you really want to be like the Oracle of Omaha, let the passage of time work in your favor and have enough conviction to let your holdings recover, which they almost certainly will sooner or later.
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