A bear market refers to a sharp and sustained decline in stock price.
A continuous decrease of over 15% is generally seen during the bear market. This phase is also marked by the pessimistic sentiment that surrounds the market.
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In simple words, this is a phase where the there is more of selling pressure in the market rather than investing.
In this article, we seek to discuss the strategies you should adopt to withstand the sharp fall of the market.
In this article
1.Keep Your Concerns in Check
It is often said that, the more a market climbs, the more is the concern surrounding the fall.
An investor should keep a check on their emotion and should try to separate feelings from investment decision making. It is good to love the stock you have bought, but that doesn’t mean you should hold the stock even if it is going down.
Booking losses is okay as long as you learn from the wrong pick.
2.Average Your Cost of Acquisition
The most critical factor to keep in mind during a market fall is that the market is bound to rebound and these falls are a part of the business cycle.
Thus, if you are a long-term investor and believe that the fundamentals of the company in which you have invested remain intact, you should add the stock to your existing position.
This process shall help you average down the cost of acquisition of the stock thereby enabling you to amplify your returns when the market rebounds.
However, keep in mind that rupee cost averaging doesn’t work for all the names and should be only used only if you believe in the management of the stock/mutual fund.
In the bear market, the bear leaves no chance for the bull to stand.
Thus, it is advisable to play dead and not fight back. Playing dead resembles passive participation in the market by investing in safer instruments such as fixed deposits, etc.
It is better to remain calm and not make any adverse moves during the bear market. While you will not make money doing this but will surely save yourself from becoming a bear’s lunch.
In a bear market, it is advisable to spread your investments across instruments.
This approach provides you with the benefits of diversification. Having a portfolio of different instruments (viz. stocks, bonds, cash, alternative assets), etc. ensures that the risk is spread out across asset class.
Should there be a situation that the market is falling, there could be bonds or assets like gold that may cushion your portfolio with positive returns.
Remember, you should have a proper asset allocation strategy that will allow you to avoid the potentially adverse effects that may be resulting by putting all the money in one stock/fund/asset.
Source: Corporate Finance Institute
4. Invest if You Dare to Lose
Investing is essential, but it doesn’t guarantee that you will always get a positive return.
Thus, you should make up your mind in a way that you do not get impacted if you lost some capital in the market. This process also helps you understand your risk appetite.
Also, as a general rule, an investor should participate in equity only if he/she has a long-term horizon. Also, investors should avoid getting involved in stocks unless you have at least five years investment horizon.
5.Scout for Value
The bear market is an excellent opportunity for investors who stick to their philosophy of picking fundamentally sound stocks.
Thus, instead of panicking during the correction and selling the shares, you should go back to your drawing board to see if there is any fundamental change in the names you have selected.
Also, you should look for stocks that are attractive after the correction and have the potential to grow over the long-term horizon. Bear market, to our mind, is the best time for real investors.
Remember, the big guns of the market were not made in a day. They also suffered bear market but their stock-picking capability, and sticking with them for long-term helped them multiple wealth.
For example, Indian investor Rakesh Jhunjhunwala reportedly invested Rs. 5 lakh in Tata Tea back in 1985 which is worth Rs. 50 crore now. That’s how an investor thinks.
Trend in the price of Tata Global Beverages (erstwhile Tata Tea Ltd)
6. Defensive Stocks Act as a Security
Defensive or non-cyclical stocks act as security to the portfolio.
These are the stocks that tend to perform better than the overall market even during bad times.
Common characteristics include consistent dividend and stable earnings among others. Companies that manufacture daily use products such as toothpaste, shampoo, etc. are considered to be defensive.
Thus, to conclude, we believe an investor should not panic with the market movement. Markets are bound to correct automatically and are also bound to rise.
As an investor, it is not your job to time the market but to focus on stock picking. And that is exactly what you should do!
Disclaimer: The views expressed in this post are that of the author and not those of Groww