Making the most of bear markets

Khyati Mashru Vasani
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Khyati Mashru Vasani

Adjusting your investment sail to make the most of bearish markets

Contrary to popular belief, bull markets do not last forever just like bear markets they also come and go. Bear markets are a part of the market cycle that will follow, impacting your portfolio negatively. No one can tell how long a bear market will last and how severely it will affect your portfolio. Prepping and strategizing on how to invest in a bear market can not only help you reduce your losses but also ensure you make money from it. The decline in global equity markets—which nosedived by more than 30% in February-March 2020—seemed unprecedented. However, the stunning pullback—by more than 35%–since then has further astounded investors.

The current bear market is the first one in a hundred years that has been sparked by a pandemic. The pace of market rebound, at least so far, is reminiscent of the less impactful bear markets. But there is no harm in adjusting your sail to cross through this wavering investment ocean. It takes courage to ride the storm, and the bear market can be difficult for both new and seasoned investors. The best approach to a bear market would depend on the investors’ time horizon, investment objectives, and risk tolerance. While most fear bear markets, it can be the best opportunity to grow your portfolio and prepare the groundwork for long term wealth building.

What to do in a bear market?

Severe bear markets may wreak havoc in your finances. Economic downturns can lead to salary cuts, reductions, and delays in payments. Before you delve into investing in a bear market, it is better to arm yourself first for a sputtering economy. Create a cushion and build a contingency fund that covers expenses for 6-12 months or more based on your money need. This will save you during eventualities and prevent you from using your retirement savings.

Bear markets are also a good time to reassess your risk appetite. Some investors wait to ride out the bear market before investing. When the market fully recovers, investors often realize that they have missed the bus. The longer you wait, the further you fall behind. So make a staggered entry into the market but ensure you have enough cash in hand. To make informed decisions, it is essential to have a financial plan in place. Without a plan, you are likely to make rash decisions during market upheavals.

Let's understand how you can optimize your investment in a bear market?

Some of the tips for investing in a bear market are as follows:

Hold tight – One, it is always a great idea to adopt a goal-based investment strategy. Identifying a goal, quantifying it, and inflating it to get a realistic target would help you to put together an investment plan to achieve the goal.

Two, if you are a long-term investor with a moderate risk appetite, you should consider consulting financial experts to guide you on your direct equity, mutual fund, and other equity investments and hold it tight in volatile times. It is better not to jeopardize your goals by liquidating long term investment.

Buy stocks – During a bear run, the stock price of most of the companies fall. It is considered the best time to invest and buy shares. However, you should buy stocks of good companies which will rise in the future. Rebalance your portfolio and shift focus from growth stocks to value stocks.

Take a long term approach – It is unlikely that the stocks you buy will yield returns within a year as it is difficult to predict how long the bear market will last. Hence take a long-term approach and buy stocks that you will hold for a longer period.

Diversify your portfolio – While bear markets are the best time to buy stocks, it can also be a good opportunity to diversify your portfolio and buy fixed income instruments. Bonds are less volatile and will give you a regular cash flow that you can reinvest. Bonds are fixed assets that reduce the amount of risk in your retirement portfolio. The addition of such assets that are not dependent on the market’s rise and fall can help you balance your portfolio.

Timing the market – most investors flee the market and exit their investments during the bear market. Market volatility is a fact and while the drop creates a panic among investors, timing the market is a fool’s errand. The best move during the bear market is to ride through the storm.

Bear runs do not last forever. Hence being patient with your investments will win the day. Do not be in a hurry to sell your stocks. Keep monitoring the growth of companies and hold shares for a longer time horizon. If you are a new investor, it is a good time to enter the market. But make sure you invest in good stocks.


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