The One Asset You Must Own in a Real Bear Market

Dec 03, 2021


For many investors, it’s practically a dirty word. And it’s not hard to understand why…

In our current fiat monetary system, holding large amounts of cash is almost always a terrible idea. Whether it’s U.S. dollars, euros, or any other paper currency, you’re virtually guaranteed to lose purchasing power to inflation over the long run.

But that doesn’t mean cash is useless. When used correctly — at the right times and in the right ways — it can have tremendous advantages over any other asset.

For example, regular Money Talks readers know I’m a huge proponent of a rainy day fund. I generally recommend setting aside at least one full year’s worth of minimum expenses in cash to cover an unexpected job loss or emergency expenses.

Now, setting aside that much money in cash probably sounds crazy to some folks. But if you’ve ever experienced financial troubles like I have, you know having cash on hand can give you peace of mind as nothing else can.

There’s no better feeling than knowing that you have the resources available to take care of your family no matter what happens.

Sure, the purchasing power of this fund will likely erode over time. But I believe that is a reasonable price to pay for peace of mind.

Why do I bring this up?

Well, as you can probably guess, I believe cash is a critical part of any bear market preparedness plan as well. And today, I’ll share the basics you need to know to raise it properly.

[Note: If you missed the first two parts of this series, I urge you to catch up before continuing. Click here to learn why I think it’s time for every investor to start preparing for a bear market. And click here for the simple steps you should take now before any selling begins.]

So, why is cash so critical in a bear market?

Cash is one of the few assets that tends to maintain (or increase) its value when other financial assets are falling. In fact, during periods of intense selling, it is often the only asset that doesn’t lose value.

Now, you might be wondering…

If the price of most assets falls in a bear market, why not just bet against those assets directly — via short-selling, inverse funds, or put options — rather than hold cash? That way, you could profit from falling prices and avoid any risks of cash.

It sounds like a great idea. But it’s much easier said than done.

You see, bear markets are notoriously difficult to navigate.

Most folks intuitively understand that bullish (long) investors tend to lose money in bear markets. After all, if you own a bunch of stocks, and most stocks fall, you’re probably not going to do very well.

But you might be surprised to learn that bearish (short) traders tend to struggle too. The extreme volatility and frequent whipsaws can make it next to impossible to hold on to a position long enough to profit.

This means the smartest goal for most folks in a bear market isn’t to earn a profit at all. Instead, it’s to lose as little as possible.

If you can just avoid suffering a big loss, you’ll be miles ahead of most other investors and well-positioned to profit when the next bull market begins.

If you’re also able to earn some trading profits along the way (which we’ll discuss later in this series), that’s just icing on the cake.

Ok, now that I’ve (hopefully) convinced you to hold some extra cash, let’s talk about how to do it.

The first consideration is timing.

Because raising cash requires selling other assets like stocks, you don’t want to act prematurely. If you start selling stocks before a bear market is confirmed, you could end up missing out on significant upside.

On the other hand, if you wait too long after a bear market begins, you could give back more of your hard-earned profits and end up holding less cash than you’d like.

As with many investment decisions, there’s no best choice for everyone.

However, a simple strategy can help balance these concerns for most folks in most situations. And even better, if you followed the advice I shared in part two of this series, you likely already have it in place.

I’m referring to trailing stop losses — particularly our TradeSmith smart trailing stops.

These smart trailing stops identify when a stock or other asset is no longer behaving in a healthy, normal way.

This strategy is excellent for protecting profits. But it’s also an ideal way to raise cash. And it’s incredibly easy to follow.

When any position closes below its trailing stop, you’ll sell it the next trading day as you usually would.

However, instead of using the proceeds to invest in a new position, you’ll simply keep it in cash in your brokerage or bank account. (More on this in a moment.)

You’ll continue to follow your stops like this until you reach your preferred cash level. In this way, most folks will find they gradually raise cash before the worst of the selling begins.

The only exception to this rule involves our proprietary Bearseye Signal.

As I shared with you earlier this year, whenever this signal appears in one or more of the major market indexes we follow, we generally recommend selling any remaining stocks you own in those indexes immediately. This even includes stocks that are still in the Green Zone.

We then recommend staying out of those indexes until a Bullseye Signal is triggered.

The next consideration is how much cash to hold.

Again, there isn’t a one-size-fits-all answer.

For example, if you’re an aggressive investor with a long investment horizon, you may be comfortable raising just 25% to 35% of your portfolio in cash initially.

Once you’ve met that threshold, you could then begin reinvesting any further proceeds into new investments (assuming those new investments are healthy).

Conservative folks may prefer to initially keep 50% or more of their proceeds in cash.

In any case, the same exception applies here.

If a Bearseye Signal is triggered, even aggressive investors may wish to get out of all stocks in those indexes and wait for the smoke to clear.

Once you’ve decided when to raise cash and how much you want to hold, your next decision is where to keep it.

Fortunately, unlike the previous decisions, this one is relatively straightforward.

For most folks, the best option is to hold cash directly in your brokerage or banking account.

In the U.S., you can safely hold up to $250,000 in each brokerage or bank account you own. (The Securities Investor Protection Corp. (SIPC) insures deposits in brokerage accounts, while the Federal Deposit Insurance Corp. (FDIC) insures deposits in bank accounts.)

So long as your cash in each account is under this limit, you don’t need to take any additional precautions. (Unfortunately, I’m not familiar with the deposit insurance limits outside the U.S. But if you live elsewhere, you should find this information quickly with a Google search.)

If you have more cash than these limits, you have a couple of options.

The easiest is simply to split your cash up between additional accounts.

For instance, if you have $500,000, you could keep half in your brokerage account and half in your bank account.

You can usually hold multiple accounts at the same bank or broker as well. However, if you have several accounts, it wouldn’t be a bad idea to keep them at different companies for an extra measure of safety.

Of course, if you’re holding a substantial amount of cash, splitting it up between several different accounts can get tedious.

In that case, you might consider buying short-term U.S. Treasury bills — ideally with maturities of 90 days or less — instead. You can buy them directly from the government itself via

Finally, the last consideration has to do with hedging.

Earlier I mentioned that I wasn’t too worried about inflation when holding cash in my rainy-day fund. I consider it a reasonable price to pay for my peace of mind.

That same logic applies here, too. The benefits of holding cash in a bear market generally outweigh any short-term risks from inflation.

But what if we could get the benefits of a large cash position while minimizing these risks?

I believe we can. And if you read my series on the “All Seasons” portfolio earlier this year, you can probably guess how:

By allocating a portion of our cash to gold and Bitcoin (aka “digital gold”).

For most folks, putting somewhere between 5% and 10% of your cash in gold and 1% and 5% in Bitcoin is reasonable.

To be clear, even these assets could sell off in a severe bear market. So you don’t want to go all in on them.

But if we ultimately experience an inflationary bear market as we did in the 1970s, these small additions could provide a huge boost to your portfolio.

That’s it for this time. Next week, I’ll be back to show how you can use this cash to take advantage of the enormous opportunities every bear market creates.

In the meantime, I’d love to hear what you think at [email protected]. As always, I can’t personally respond to every email, but I promise to read them all.