Investing in stocks and bonds during a long bull market is simple enough. It is a little more challenging when everything is going downhill and inflation is at a record high.
In the 25 years since foreign investors began actively investing in the Indian market, Indian stocks have gone through four bearish trends.
The first of these four bear markets was the Russian debt collapse in 1998. During that time, Sensex fell by approximately 30% in value. The second bear market was when the tech bubble burst in 2000-01, and Sensex fell by approximately 43%. The third event was the global financial crisis of 2008-09, during which the stock market was one of the poorest performers in the world. During this phase, Sensex fell by around 52%. Lastly, we had the Covid-led pandemic-related sell-off just last year, which was the latest bearish trend in the Indian stock market.
However, investing activities in the stock markets across the globe continued. For this, the investors restructured their investing strategies and kept certain terms and conditions that come along with the bearish trend. To understand this in greater detail, let us first look at what a bear market is and how it is created.
What is a bear market?
When a stock market index falls by 20% or more from its recent high, then the market is considered to have entered a bearish phase. You can also consider the onset of a bear market when any single stock plummets 20% or more from its recent highs.
A bear market is characterised by falling returns, a negative market mood, and increased stock sell-offs. It can be triggered by a variety of factors, such as a poor or faltering economy, wars, bursting market bubbles, geopolitical crises, and significant economic shifts.
It has been observed that the quicker an index enters a bear market, the shallower the bear market tends to be.
An important thing to consider is that a bearish phase must not be confused with a period of market correction. For instance, in the present day scenario, with many factors plaguing stocks worldwide, such as the Russia-Ukraine conflict and rising inflation, major global indices such as the Nasdaq have seen a bearish trend. But the Indian exchanges have not seen this extremity yet, and Nifty is facing only market correction as of now.
Let us understand the difference between the two for better clarity.
Bear market vs market correction
A stock index is deemed to be in the correction zone when it loses more than 10% from a recent peak. A correction is a temporary movement that might last from a few weeks to months. On the other hand, a bear market is characterised by a more significant and prolonged decrease in value than a correction.
Bear markets usually result from a more dramatic shift in investor attitude. While a correction reflects some anxiety about more immediate occurrences, a bear market reflects more serious, long-term difficulties, such as an economic catastrophe, rather than just a few poor financial data reports.
Now that you understand what a bear market is, let us look at how to go about investing in such a phase.
The terms and conditions of investing in a bear market
People often ask where to invest during a bear market, or should I invest during a bear market?
While you may put off investing until the bear market has passed, you will soon realise that you have missed the opportunity to grab some highly valued shares at a low price. So, enter the market gradually, but ensure you know your risk appetite.
The following are some investment tips for a bear market:
1. Think long term
Probably one of the wrong actions you can do in a market crash is reacting predictably without thinking. Over time, any investor tends to underperform the stock market in general, and the fundamental reason is that they actively trade in the market.
When equities plummet and appear to be going nowhere, our reaction is to exit before matters go any further. Moreover, when the bull market is over and equities continue to hit new highs, investors invest for fear of missing out on profits.
However, the main strategy needs to be to invest for the long term. Put your funds in equities that you intend to own for the long term, and do not sell them just because the market is down. The long time period allows you to ride out the market fluctuations.
A perfect way to summarise the importance of long term investing is by this quote by the father of value investing, Warren Buffett, which says, “If you are not willing to own a stock for ten years, do not even think about owning it for 10 minutes.”
2. Avoid panic selling
The last thing you should do in a declining market is panic sell. As investors start panic selling, there is even a greater fall in the share prices, pushing the market further down. The chaos pushes you to make poor choices that have serious consequences.
During this period, avoid going with the flow of your emotions. Instead, focus on navigating through the market turmoil using proper research and analysis tools. Never sell because you are afraid of losing money. If you have the right strategies in place that are based on extensive study and groundwork, your investments will be safe. However, keep in mind to revise your plan and strategies from time to time to avoid any deviation.
3. Focus on quality stocks
When a bear market or market crash occurs, many companies go out of business or have to suffer huge losses. This is because the market crash is closely linked to poor economic conditions. If the economy underperforms, corporations that are overleveraged or lack actual competitive advantages are struck the hardest, while high-quality firms remain relatively stable.
Thus, it is critical to concentrate on companies with solid balance sheets, growth potential, and long-term competitive edge during uncertain times, to minimise losses and put yourself in a better position.
4. Rupee-cost averaging
An investor needs to keep in mind that rather than trying to time the market and investing in one go, it is advisable to split the entire investment value into multiple segments and invest the money at different intervals. In case a bearish trend in the market occurs or a market crash happens, you can buy more shares of the same company that you previously invested in, bringing down the average cost of your entire investment. This is also known as rupee cost averaging.
This will average your cost and will ensure that you do not put all of your money into the market while it is at its high while still profiting from market troughs.
5. Diversify your portfolio
Portfolio diversification refers to adding a variety of asset classes in your portfolio in order to minimise your overall risk while maximising your return. For instance, you can reserve a portion of your portfolio just for risk-free investments (such as Government securities), and the rest you can invest in equities, which are considered to be highly risky.
Bear markets are ideal for buying equities as the prices of the shares fall. This makes the bearish trend a great opportunity to diversify your portfolio. There are two ways to do this. First is, you can invest in shares of companies that fall under different sectors. As the market forces affect separate sectors differently, a fall in one sector can be offset by a good performance in the other if you hold securities of both in your portfolio.
The other way to diversify is by purchasing bonds. Bonds are risk-reducing fixed assets that can help diversify your investment portfolio. They are less unpredictable and provide a steady stream of income that you can reinvest. The inclusion of investments that are unaffected by market fluctuations can boost returns.
To understand the intricacies of portfolio diversification, read our article on ‘stock investing in India – what is diversification of portfolio?’ on the Teji Mandi blog.
6. Invest in sectors that do well during downturns
Defensive equities, such as consumer staples, utilities, healthcare, and companies with higher-quality operations and financial sheets, may provide greater opportunities during a market slump.
You may also find opportunities in higher-quality dividend-paying stocks, particularly those that have consistently increased their dividends. You can add these stocks to your portfolio to increase your stability as these sectors do well during market downturns. These stocks may help raise your total return when stock prices are declining.
Further, index or exchange-traded funds can be a great strategy to invest in those sectors as they provide more diversification than a single stock.
7. Rebalance your portfolio
During a prolonged bull market, your shares may appreciate or depreciate faster than your bond or cash holdings, causing your portfolio to deviate from your chosen asset allocation.
Reap the benefits of this chance to fix any imbalances that may have arisen. Suppose equities account for too much of your portfolio. In that case, the onset of a bearish trend can be a good moment to sell some and invest the proceeds in liquid assets or bonds, subject to market circumstances and your specific position.
To rebalance your portfolio, you must first be able to evaluate its performance. Read our article on the 4 ways you can successfully evaluate your portfolio on the Teji Mandi blog.
8. Check in with a financial advisor
Consider seeking professional help if you feel stuck and do not know the best investment move in a falling market. Investment advisors assist you in reviewing your financial strategy and providing investment advice that mitigates the impact of a market downturn. This applies to both, your short and long-term objectives.
Teji Mandi is a SEBI registered financial advisory. Our experts have years of investing experience and are trusted by over 10,000 investors. We can help you curate and manage a portfolio that enables you to achieve all your financial goals while keeping your risk profile in mind. We also offer active advice to help you navigate market downturns and bearish trends. Reach out to us through our website to get started!
Although pulling your money out of the stock market during a bear market or market crash may be tempting, it is essential to remember that this is not always the best strategy. Sometimes, market crashes can be a significant opportunity to invest in undervalued stocks.
In a bear market or market crash, staying calm and sticking to your investment plan is a must. It is also critical to plan when it comes to your investments. By researching and investing in solid businesses, you may reduce your risk and increase your potential returns.
Thus, shift your focus to strategic and long-term planning rather than getting caught up in the market hype or worrying about the bear run. To get professional portfolio management services to build a portfolio that supports your journey to attain your financial goals, reach out to us on our website!