Strategies for Navigating a Bear Market Investment Scene
A financial plan doesn't have to be complex. One can start with systematic investment plans (SIPs) for a systematic approach to investing.
In the Indian stock markets, particularly the NIFTY 50, significant market downturns, or bear markets, have occurred eight times in the last 25 years, averaging to one every three years. These bear markets can be challenging, but it's essential to remember that they are followed by bull markets and new all-time highs.
During a bear market, one should not expect double-digit returns from equities. Instead, one should expect low or negative returns and balance the portfolio with other asset classes like bonds, gold, and fixed deposits.
Bear markets are regular but intermittent features of stock market history. Since 1928, they have occurred on average about once every seven years in the U.S. stock market. Historically, a bear market in India has lasted an average of eight months, but the following bull market lasts an average of 2-3 years.
Bear markets can be triggered by factors like high inflation, rapid interest rate hikes, or economic shocks. During bear markets, investors should sell losers and invest in winners, get their asset allocation and rebalancing right, and mind their emotions to avoid rash decisions.
Investors should control their emotions during bear markets as they play a significant role in guiding behavior. US stocks have lost an average of 36% in a bear market, but have gained an average of 114% during a bull market.
Many investors sell their equity holdings at rock-bottom prices during bear markets, incurring big losses in their portfolios. However, if one remains invested, they could be rewarded with strong returns in the subsequent bull market. For instance, the NIFTY 50 dropped by 20% from an all-time high in September 2000 and took until September 2001 to reach an all-time low, falling by 45%. However, if one remained invested, they would have been rewarded with a 3.7% compound annual growth rate (CAGR) over the next three years and 15.4% CAGR over the next five years.
To be more satisfied with their wealth, investors should hold their nerve during bear markets, temper return expectations, and follow appropriate asset allocation and regular portfolio rebalancing. A good financial plan should include provisions for emergencies, a cushion for buying opportunities, flexibility to move from growth stocks to value & defensive stocks, and disciplined rebalancing.
Investors cannot control the direction of the stock markets, but they can manage areas like not dwelling on past actions or inactions, improving portfolio allocation, and regular portfolio rebalancing. In the long run, equities have outperformed other asset classes like gold, debt, and cash, but are prone to volatility and bear markets.
Markets have had big falls in 2001, 2008, and 2020, but have also witnessed one of the strongest bull markets in their history post the fall. This underscores the importance of staying invested during bear markets and being prepared for the subsequent bull market.
In the US stock markets (specifically the S&P 500 index), there have been 26 bear markets since 1928, which also averages to one in every three years. The average duration of a bear market is about 11 months, with an average cumulative loss around 31.7%. While corrections (declines of 10% or more) happen more frequently, about once every two years, bear markets are less common but significant market downturns.
The severity and recovery times of bear markets have generally moderated since the Great Depression, with the post-war era showing shorter and less severe declines compared to the 1930s. This shows that while bear markets are a regular feature of stock market history, they are not a cause for undue concern for long-term investors.
[1] Investopedia. (n.d.). Bear Market. Retrieved March 27, 2023, from https://www.investopedia.com/terms/b/bearmarket.asp [2] Investopedia. (n.d.). Correction (Finance). Retrieved March 27, 2023, from https://www.investopedia.com/terms/c/correction.asp [3] Yahoo Finance. (n.d.). Bear Market. Retrieved March 27, 2023, from https://finance.yahoo.com/learn/bear-market/ [4] Investopedia. (n.d.). Great Depression. Retrieved March 27, 2023, from https://www.investopedia.com/terms/g/greatdepression.asp
Investing in personal-finance should involve diversifying one's portfolio with asset classes like bonds, gold, and fixed deposits during bear markets in the stock markets. A good financial plan should also account for provisions like emergencies, buying opportunities, and regular portfolio rebalancing.
