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It’s in times like these when the majority of stocks are in or approaching a bear market – a 20% drop from their highs – which we wonder…

What now?

It’s time to establish what your goals are. Are you in it for the long haul or are you a short-term trader?

It makes a difference. If you are a long-term, buy-and-hold type, then predictions of a bear market are a dream come true.

Keep in mind, a bear market is not a market crash. If you think another 2008 or 2009 is in the cards (I don’t), then you should sell everything now and move into cash. Then wait to deploy it until the S&P trades for half the level it is at right now. Nothing was spared during that crash.

But if you are looking at the fundamentals of the economy and why we are where we are, you should start picking up your favorite stocks.

First, don’t pay attention to indexes, terms like “bear market” or the talking heads who appear on news shows. They are rarely right and usually great Monday morning quarterbacks.

Second, pay attention to which companies have solid fundamentals. Start by taking a look at how leveraged a company is. Companies with high debt loads usually don’t fare well in a down cycle.

Then look for strong dividend-paying companies and check to see that their cash flow is more than adequate to cover those dividends. Companies that return money to shareholders in the form of dividends are often well-managed during down times.

Finally, look for companies that have staying power. These companies fulfill needs, not wants. For example, do you really need a $6 latte when your company is talking about layoffs? No? But I am sure you’ll still keep your bathroom clean and take a shower if there is a recession.

If you are a long-term investor, it is time to build or rebuild your portfolio with quality companies that are trading at discounts to their long-term value. But don’t just leave it there.

If you plan to be in the game for five, 10 or 20 years, you can use this opportunity to buy some companies that you think might be the strongest players 10 years from now. Those are likely to be in the technology and biotech spaces – both have been hammered by 20% or more.

In this case, you are better off buying exchange-traded funds that own several of these companies. Putting your bet on one or two will leave you too exposed.

If you are not a long-term investor but still want to remain in the game in case man-made causes of volatility – like the trade war with China, rising interest rates and political dysfunction – reverse course, then I have another idea for you…

Buy Long-Term Equity Anticipation Securities (LEAPS), or long-term options. These options expire in a year or two and allow you to bet on the direction of the underlying shares for around 10% to 20% of the cost of owning them. In other words, you can still be in the market while most of your cash is not. However, since LEAPS do expire, this strategy would make you a shorter-term investor.

No matter what happens in the market today or tomorrow, history has proven that the stock market remains a growth engine over the long term.

Even if you were ever in the unfortunate position of buying at the highs, there has never been a time when the markets did not rebound and eclipse their old records. It might take years… but it will happen.

Good investing,

Karim

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