Introduction
In this blog post, let us discuss the most important behavioural aspects on how to handle bear markets. It is very common for people to enter at the top of the bull run and end up selling in the bottom of bear markets leading to significant losses. Let’s go through the strategies to handle bear markets.
1. Study the history
Before you act on any impulsive decisions, it’s important to recognize that market cycles are just that – cycles. Just as bull runs occur, so too do bear markets.
Indian equities don’t have much data to study but if we look at S&P500, since 1928, There are 26 bear markets, and also 27 bull markets. And the bear markets are shorter compared to bull markets.
Examining the historical facts from equity investing, would help you to ignore the short-term noise and help you pick quality stocks.
Do refer our blog on the Coffee Can Investing approach, that really do well at times of bear markets and crashes, also refer the performance of Coffee Can Portfolio created from here.
2. Don’t invest with loan amount
I remember doing the same mistake during the initial year of my corporate journey. I have invested in momentum small case financing it through a loan. I was really confident on my investment and on my smallcase manager and I was really optimist on Indian equities.
I expected that my returns from investment surpass interest of my loan.
However, the same year I lost 40% on my investment, and I had to stay invested for 16 months and inject a significant portion of my salary to the same fund hoping for recovery, finally I exited with 6% loss on my portfolio level.
It is not even bear market, just during the consolidation phase of markets.
If you bought the dip, it may still dip. Never invest with loan amount in Stock Market.
3. Never invest Emergency Fund in Equities
We have discussed about the Importance of Emergency Fund and how important to have an emergency fund.
Potential high returns may seem exciting, but really emergency fund serves specific purpose – To provide a safety net in times of unexpected expenses or income loss. Placing it in stock market have higher exposure to high volatile investment and can result in capital loss.
At difficulties you may be forced to exit at the bottom of the bear market.
4. No Equity for short term – Think about long-term
No matter how sure you are, even the expert advices, Equity investments are not for short-term. Saurabh Mukherjea in his book, explained a case study how an individual lost his money or generated low returns by short term investing.
How ever, short term investing activity would look great but after the transaction cost and tax, It won’t worth the risk.
5. Seeking professional Advice
During the crash, mixed emotions come into play, you might surely end up in taking irrational decision. Seeking professional advice could be a wise decision, Financial advisor can offer valuable guidance to navigate through bear markets, also recommend rebalance to your portfolio and also you get to have a balanced portfolio in debt and equity allocation.
6. Knowledge on the Company
If you have already invested in stocks, It’s really important that you read management conference calls, and investor presentation as it adds confidence to your investment thesis by revising how the management plans to grow.
If you doesn’t know the opportunity size of your investment you may not have strength to hold on to your investments.
7. Stay Away from Markets
This is personally my favourite way of dealing with bear markets. The most effective strategy to save money during sales events like Big Billion Day and Great India Festival is to uninstall the application. Similarly, uninstalling investment broker applications during bear markets can also be advantageous.
Maintaining active SIPs while staying out of the market can prove beneficial, enabling you to invest during periods of low stock prices and avoid potential issues associated with market involvement.
