A “bear market” is the inevitable stage in the market cycle that every investor dreads and hopes that markets never experience. It is characterized by a period of constant decrease in stock prices along with pessimism and uneasiness. The scariest market occurrences you’ll experience are bear markets, which occur when an asset’s value drops 20% from recent highs. But keep making investments.
Many investors experience panic when they hear the term “bear market.” However, these severe market downturns are inevitable and frequently only last a short while, especially when contrasted to the length of bull markets, during which the market is appreciating in value. Even in bear markets, there are lucrative investing possibilities.
More information on what a bear market entails and precautions you can take to ensure your portfolio endures (and perhaps even flourishes) until the bear turns into a bull are provided below.
How long do bear markets continue, and why do they occur?
Although it doesn’t always happen, a bear market frequently happens just before or after the economy enters a recession. Investors closely monitor hiring, wage growth, inflation, and interest rate indicators to determine when the economy is slowing. Investors anticipate a short-term reduction in business profits when they observe a contracting economy. So, they sell equities, which causes the market to decline. A bear market may portend increased unemployment and difficult economic circumstances.
In general, bear markets last 363 days on average as opposed to 1,742 days for bull markets. According to data gathered by Invesco, they also tend to be statistically less severe, with average losses of 33% compared with bull market average gains of 159%.
The coronavirus bear market, which started on March 11, 2020, quickly transitioned into a bull market phase, while the full extent of the economic effects are still unknown.
Is a Bear Market Good or Bad?
The stock market is said to be in a bear phase when a large index, such as the Nifty, declines by at least 20% from its most recent high. When there are pessimistic expectations and it is anticipated that the economy will face difficulties that could result in a slowdown and recession, markets move through this stage.
The most recent and quickest bear market began at the same time as the outbreak. In just 20 days in March 2020, the Nifty fell an astounding 32%. Investors may take solace in the fact that historically speaking, bear markets are shorter-lived than bull markets.
The Positive Side
Depending on where you are positioned, a bear market may be beneficial or detrimental. Is buying during a bear market a wise idea? When investing for the long run, buying during a bear market is frequently a wise move. Even while a 20% or more loss in price is painful in the short term, if you can get in at a cheaper price, the market will likely rise again to new highs, as it has done after each previous bear market.
Bear markets are preferred by other investors who have sold equities with the intention of eventually buying them again at cheaper prices because that is when they can profit.
The Negative Side
However, because investing is by its very nature an emotional experience, bear markets may sometimes be awful.
Some investors simply cannot bear to watch the value of each individual stock position decline by 20%, 50%, or even more, and they end up liquidating their holdings shortly before the market bottom. These investors then remain on the sidelines and miss out on the recovery when markets turn around and enter a new bull market.
The following guidelines for investing can be used in a bear market:
1. Rebalance your Asset Allocation
Asset allocation, a frequently discussed and advocated financial technique, performs admirably during a weak market. Diversifying one’s investments across asset classes gives the portfolio the much-needed stability. Rebalancing your asset allocation during a bear market may result in investing in stocks while everyone else is staying away from them.
2. Portfolio diversification
This makes sense as the next step in asset allocation because it also helps to lower risk and volatility. However, investors frequently disregard this guideline in their desire for immediate, maximum profits, which can be detrimental to the portfolio during a market collapse.
3. Look for disguised investment opportunities
Investors frequently lack awareness of both risk and opportunity during bull and bear markets. The upside of a bear market is that it frequently presents opportunities for savvy and long-term investors to purchase blue-chip stocks at bargain rates. Even the most stable and financially sound businesses might experience intense selling pressure during this stage, opening up investment opportunities that might otherwise only exist on paper.
4. Avoid herd mentality
Be fearful when others are greedy, and be greedy when others are fearful, as legendary investor Warren Buffett so eloquently put it. Due of their tendency to follow the crowd, investors often act just the opposite.
5. Systematic Investment Plan (SIP)
It is common for nervous investors to stop SIPs at the first sign of a bear market, fearing a loss of investment value. Continue with your SIPs if you have them running. SIPs enable you to invest without emotions and help pick up units at lower NAVs, eventually reducing the average investment cost.
6. Exercise patience
It is the virtue of successful investors. Realise that a bear market is just another phase in a market cycle that, too, shall pass. Rather than panicking, start looking for opportunities that are often disguised.