The S&P 500 briefly fell below the 20 percent threshold recently. This downward fall defines a bear market on Wall Street.
Is it only a brief affair and will it rally up smartly?
Well, we cannot exactly time the market and control it. However, we can be more strategic and analytical in our investment. Overreacting and making fear-based, herd-mentality decisions have served as no investor.
We already know it’s coming.
Pandemic forced people to save and delayed spending. Supply of raw materials and commodities plunged, and the supply chain got disrupted, leading to a supply/demand imbalance.
This led to a surge in the prices — leading to inflation. Plus, lower interest rates soared the demand for consumer goods and homes, which further inflated the prices.
Plus, there is uncertainty about the Russia-Ukraine war, continued ravages of COVID, and skyrocketing energy and commodity prices. This is cumulatively escalating the fear among investors.
The best we can do is learn from history.
What does bear market history tell us?
According to Hartford Funds, there have been 26 bear markets since 1928. However, the bull market has been 27. Stocks lose 36% on average in a bear market, but it gains 114% on average during a bull market. And every bear market is followed by a bull market.
Another interesting fact is that, on average, bear markets last an average of 289 days, while bull markets can run upwards of 991 days.
What investors fear is a looming recession. But the history also tells us that not every bear market showed a recession. It can also be an economic slowdown. The world has seen 26 bear markets and only 15 recessions since 1929.
What do these facts show? The bear market is temporary. Downturns are temporary. A bear market is short-lived compared to a bull market. And after every bear market, there is a significant jump in the stock market.
How to invest during the bear market?
The most important thing is to be calm and doesn’t panic, follow the strategy and not randomness, have long-term thinking over short-sightedness and make decisions based on analysis and not emotions. And yes, take help from experts.
Here are five ways to beat the downturn
* Invest for the long term
Bear market brinks fear, doubt and anxiety. But following the herd and getting into panic selling is not the answer. In fact, Warren Buffett says, “Be fearful when others are greedy, and be greedy when others are fearful.”
Most investors sell off to invest in stocks that may seem safe. But this short-term mindset weakens their portfolio, and they may lose out on the monster gains when the market rebounds.
The bear market offers plenty of opportunities to invest in various stocks at a bargain price.
There are several larger corporations whose stock prices drop because of fear in the market, irrespective of their long-term performance. If you know how to pick companies that have proven potential to soar, you can get their stocks at the lowest bargain price in years.
* Diversify your portfolio
Whether it’s a bear market or not, diversifying your portfolio and having a mix of stocks is always an excellent strategy.
Not every company’s stock prices fall in the same amount. And if you have more winners than the losers, you will be on the positive side of the equation.
This is the reason you should take the help of the experts to have a portfolio mix that keeps you on the right side of the equation.
There are companies which are outrageously overvalued and are in ridiculous high debt and pathetic earnings. Immediately eliminate them from your portfolio.
Invest in companies with strong fundamentals, healthy balance sheets, and are long-term performers.
An index fund and EFT allow you to diversify your fund in many companies rather than investing in a single stock.
* Right Asset Allocation Dharma
Have a portfolio of different investment assets based on your goals, investment objective, risk tolerance, and investment horizon. Investment assets — stocks, bonds, cash and real estate — balance out your risk and rewards.
The right strategy is to have a portion of your portfolio that you invest back and forth based on the market situation.
* Take Advantage Of Systematic Investment Plan (SIP)
SIP allows you to invest a certain amount of money regularly. You invest a fixed sum in a mutual fund scheme. Mutual funds are market instruments investing funds in stocks, bonds, commodities, etc.
The idea is to invest in high-quality SIPs regularly and accumulate stocks of excellent companies at every step. And instead of investing a lump sum, you spread out your investment evenly. This further reduces the risk of market volatility. You do not have to time the market.
And keep them for the long term till it compounds — generating you a profit on profit.
* Invest in Defensive Sectors & Stocks
First, recognise there are some sectors that are more vulnerable and if do not want to stay in the high-risk zone, you need to shift your portfolio towards sectors that add stability.
Food and personal care stocks, utilities, healthcare, pharma, and consumer staples tend to outperform during the bear market.
A bear market can be scary but making a fear-based investment decision is a fool’s game. You are investing to win and winners have a strategy. They analyse, plan, and prepare and do not make their decision based on randomness & short term.
(By Videsh K Totaare, MD & CEO, Archers Wealth Management Pvt Ltd)