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How I’d profit from a share price bear market in 2020

A 2020 stock market crash might have seemed unthinkable a few months ago. But the prospect of exactly that is making the headlines again. Is it likely? The chances might be 50/50 or less, but I’m definitely starting to expect a bear market in 2020.

Putting aside global contributions to any upsurge in negative feelings, fears for our future trade relationship with the European Union seem to lie behind the growing domestic gloom. We probably won’t get a good idea of the chances of a decent EU deal until later in the year. So if things are looking bad by the second half, that could be when we see the worst of any downturn.

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I’d expect financial stocks to be hit quite hard, and I’ve recently examined the prospects for Lloyds Banking Group. Lloyds might have pulled out of Europe, but I think it could be in for a tough 2020.

Economy slowing

UK economic growth ground to a halt in the final quarter of 2019, reflecting the growing uncertainty. And economists have suggested our underlying economic momentum slowed over the year. A poor couple of years could see demand for mortgages and business loans dropping. And that could hit Lloyds and the other banks, and perhaps even threaten their growing dividend yields.

Now investors tend to push shares unduly high when times are good. And, conversely, they drag them too far down in darker days. So I’m expecting a good stream of oversold bargain stocks to come our way in 2020.

What about the timing? If you buy cheap shares now, won’t you be kicking yourself later in the year if prices fall? Suppose you buy a stock on a 5% dividend yield now. If the price falls 10%, you’ll have missed the chance to lock in an increased 5.6% yield. And a 20% price drop would lift the yield to 6.3%. That difference in yield could make a significant difference to your returns over the next decade or so.

Timing

But timing the stock market is near impossible, so I never try. Instead, every time I have a suitable sum to invest, I go for whatever’s at the top of my buy list. My investments get spread out over time, and that evens out the ups and downs.

What if you have a lump sum to invest? You’ll have to weigh up the advantages of being fully invested as soon as possible against the risks of piling it all in at a high point. As it happens, I do have a lump sum to invest, released from an old company pension scheme and now in a SIPP.

Spread out

With that cash, I’m spreading my investments over the year. I’ll make an investment or two, then get back to my research, then dip into another stock, and so on. That’s an easy approach for me, as it takes me ages to decide I want to buy a stock. And there are very few I’m confident of to buy at any one time.

Overall, I’ll watch out for reliable well-covered dividends, and hopefully pick up some good long-term yields in 2020.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.