A bear market is t situation when there is a market-wide correction in the price of stocks by at least 15-20%. This decline is also coupled with pessimism about the market among the participants. Clearly, it is a time when participating in the market could be dangerous as everyone talks about selling and market falling further. Thus, you must remain calm and adopt a strategy to withstand the bear market.
In this blog, we seek to walk you through the strategies you may adopt while facing the early times of the bear market.
Generally, it is seen that after nine years of the bull market, there is a possibility of a bear market. But it is challenging to predict the onset of a bear market. Since it is difficult predicting the beginning of the bear market, you must have a strategy ready for implementation whenever things turn grim in the market. Also, remember there is no reason to panic due to the bear market. Often people get scared even with the name bear in the market but remember it is possible to not only survive the bear market but also prosper in the same provided you have the right strategy and right execution. If we talk of the Indian market, 2017 was a blockbuster year, and some credit goes to demonetization of late 2016 that took the base several points below its level. This helped investors garner very healthy returns in the range of 30-40% in one year. But this optimism went down the drain in 2018 when the budget had surprises and the economy unveiled multi-million dollar scams, political tension, geopolitical tension, trade war, and what not. This evidently panicked investor and the market saw a steep fall from its high time, but still, a plethora of investors made money. The story repeated for 2019, as well.
Following are some of the strategies that you may try exploring to withstand a bear market –
Average down cost of acquisition
Whenever you see bears taking charge of the market, you must get back to your drawing board and assess every name of your portfolio in detail. Be it a mutual fund or a stock or a bond; you should evaluate every instrument minutely. This assessment should be fundamental and should only talk of value over the long-term. Once you have rechecked all your investments and found them to be undervalued to its intrinsic value (in a sense fundamentally sound), then without any second thought, you should start accumulating the names more to your portfolio.
At this juncture, team Tarrakki recommends you to keep the portfolio allocation the same and tilt slightly towards the defensive sector/stocks. Also, we recommend not to add to your position at once but conduct the acquisition of assets in parts over time to get the benefit of further correction if any. By this approach, you will “average down” the investment price, which leaves you with better profitability over the long-term.
During a bear market, the bears’ rule, and bulls do not stand a chance in the market. Thus, it is advisable to play dead and remains a silent spectator, as fighting back in the bear market is harmful. We believe you should sit back and relax and watch the market. Remember, the market is bound to correct, and this correction is not forever. People who thought Sensex at 10,000, a decade back, is high would be the biggest losers when we are inching close to 40,000.
Diversification is the key
We have always supported diversification because we firmly believe the weather isn’t the same throughout. Thus, it is essential that you allocation a portion of your portfolio to stocks, bonds, mutual funds, gold, real estate, and the likes. This shall help you ensure that your portfolio is shielded from any sharp volatility. For example, typically, gold and equities have an inverse relation. So, if the equities are performing well, the gold component may not provide gain.
On the other hand, in a bear market or during a recession, gold has worked wonders. So, net-net your portfolio sees some positive activity. Also, another level of diversification we suggest is based on the time horizon. There’s no point in keeping all stocks, funds for the long-term. You may have some for short-term and medium-term also so that the objective at that period are not compromised.
Participate if you can withstand losses
Not every investor has the capacity to withstand losses in capital. Remember, while investing or capital build-up is essential, at the same time, the basic necessities remain – roti, kapda, and makaan. By rule, an investor should not participate in equities from short-term money viz the emergency fund or the fund that is kept aside for critical expenses such as food, grocery, education, rent, EMIs, and the likes. Equities by nature, are risky and have rewarded accordingly to the investors. So it is advisable only to participate if you have surplus left after all your essential expenses.
Scout for value
The bear market provides an excellent opportunity for investors who invest in a vision. The simple trick is always to look for beaten-up stocks that are undervalued to its fair price. Ace investors consider bear markets as buying opportunities because of the attractive valuation. The market doesn’t spare anyone, and even good companies face the heat during a bear market. Thus, it is advisable that you go back to your drawing board, scout for names based on cash flow related parameters, and if you see the value, choose to invest.
Invest in defensive sectors
Defensive or non-cyclical areas are those that generally perform better than the overall market during bad times. These are the sectors that typically do not see the period of slow down and are more consumer-driven. Companies that produce household non-durables products such as brushes, toothpaste, shampoo, soap, and likes are such companies. In simple language, FMCG is the best defensive sector.
During the bear market, an investor should look to invest in defensive names so that some portion of the portfolio perform despite a volatile environment.
To conclude, as an investor, it is obvious to get fearful of the bear market, but there is nothing to panic as it is business as usual. Markets are bound to correct at every interval, and it is a healthy sign of investing. All you need to do is have the right approach to investing.
With this, let us introduce you to Tarrakki – a mutual fund investment platform that has made investing more straightforward like never before. Download the app today and unveil the world of investing opportunities. The app not only distributes funds but also recommends and educate a layman about mutual fund so that he becomes his own portfolio manager.
Should you have any queries, feel free to drop in a line at firstname.lastname@example.org, and we shall be glad to assist.
Until then, happy investing!