Bull or bear market for ASX shares? Here's a strategy for both

Worried about a second ASX bear market? Here's a strategy that can help you win either way

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Last month, the S&P/ASX 200 Index (ASX: XJO) entered into a bear market. A bear market is when the stock market as a whole falls more than 20% from its most recent high.

This was significant – we hadn't seen a bear market in years and it came after what was one of the best years in history for ASX shares in 2019.

However, if you blinked you might have missed it! As of Monday this week, the ASX 200 was back in bull market territory, having notched up more than 20% in gains since the lows plumbed in March.

Talk about a one-two switch!

But with the markets recovering so strongly in the midst of this coronavirus crisis (which I think we can all agree is unfortunately far from over), many investors are getting nervous. Has the market found its bottom, or is this a false recovery?

Well, the hard truth is that no one knows. Not me, not any of my Foolish colleagues, not Warren Buffett and (unless you, dear reader, have a crystal ball) not you.

It literally could go either way.

And yet I don't think we as investors are going to be forced to make a bet one way or the other. In my opinion, it is possible to have a foot in both camps.

So how does one prepare for both scenarios?

It's by holding cold hard cash.

Cash can be king

See, cash as an asset is the complete opposite of holding ASX shares.

Shares (for the most part) grow in value over time, cash inflates away. Shares are volatile, cash is static and liquid. And because it's static, it can form a cushion for your portfolio. If your portfolio is 100% invested in shares and the market drops 50%, your portfolio will do the same. But if you're weighted 50/50 with cash and shares, your portfolio will only drop 25% in a similar scenario. 

So if you're not sure which way the markets will go in the next few months, the best way to be prepared (in my opinion) for either scenario is to build up a significant cash position. I'm not suggesting a 50% cash buffer here – it's really up to you and your risk tolerance. You could go 10%, 20% or 50% (for example). 

If shares do drop down the road, you can add to your positions and if the markets keep going up, you've already got shares to benefit from this trend. Thus, you have a foot in both camps, and you see benefits either way.

If volatility doesn't bother you, by all means stay 100% invested. History shows investors who do this end up more than fine in the long-run. But if you're worried, I think it's far better to have a bet each way than trying to guess when to pull everything out and then put everything back. History is less kind to that strategy!

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ⏸️ Portfolio Construction

asx shares versus cash represented by man in dinosaur mask withdrawing cash from atm
⏸️ Portfolio Construction

Top fund manager Dalio warns investors to stay away from cash

Top global fund manager, Ray Dalio, has told investors to stay away from cash and bonds in the current economic…

Read more »

three reasons to buy asx shares represented by man in red jumper holding up three fingers
⏸️ ASX Shares

How these 3 letters could see your ASX shares outshine

With the ASX 200 still down 13% from its 20 February all-time highs, these 3 letters could give some ASX…

Read more »

ASX mining shares iron ore price share price falling represented by cartoon of little business men falling off broken graph arrow
⏸️ Portfolio Construction

How I'd position my ASX share portfolio for the next market crash

The S&P/ASX 200 Index (ASX: XJO) is climbing higher today but I'm looking ahead to the next potential ASX market…

Read more »

A man holds up his hand with 3 fingers up
⏸️ Portfolio Construction

Why now is a great time to buy ASX shares

It's easy to get spooked out of buying ASX shares right now. Here are a couple of reasons why I…

Read more »

rise in asx share price represented by one hundred dollar notes flying freely through the air
⏸️ Portfolio Construction

How to make money by investing in ASX 200 shares

It's tough to know how to invest right now. Here are a few tips to help boost your chances of…

Read more »

A man scratches his head wondering if the BHP share price is a buy or not
⏸️ Portfolio Construction

Is it time to save more or invest more in ASX shares?

It's a scary time to invest in ASX shares. But here's why I won't be sitting on cash and waiting…

Read more »

⏸️ Portfolio Construction

5 blue chip ASX 200 shares a beginner can use to start a share portfolio

Here are 5 ASX shares like Wesfarmers Ltd (ASX: WES) that a beginner can use to start building a diversified…

Read more »

New ASX share buy ideas
⏸️ Portfolio Construction

3 tips for beginners investing in ASX shares

Here are a few simple investing tips for beginners looking to build out their ASX share portfolio in the current…

Read more »