Why it is important to stay invested when the markets take a bear turn
“Be fearful when others are greedy, and greedy when others are fearful.” — Warren Buffett
Stock markets mirror life - there are ups and downs, highs and lows. Bear markets follow bull runs, and inevitably give away to another bullish phase. But while most everyone enjoys bull markets, it's the bear markets that can be tough on investors' nerves. No one can tell how to anticipate them, know how long they will last, or how severely they will impact stock prices.
We find ourselves in the throes of one such global bear run currently. But the good news is that not only can you survive a bear market, but you can also position yourself to benefit if you play your cards smartly. Nimble investors can use the period to boost their portfolio and lay the groundwork for long term wealth creation. Here are some ways to make the bear phase not just bear-able, but also potentially profitable.
Firstly, what is a bear market?
A bear market is when stock prices plummet, and a sweeping negative view causes the sentiment to further entrench itself. Investors start anticipating further losses in a bear market and as selling continues, pessimism grows. Panic selling sometimes helps you stem further losses, but the bigger danger is when people stop investing altogether - out of fear, confusion or lack of knowledge. The current crash of the markets is fundamentally different from others in the past because it is a cumulative effect of a recession that has been engineered - entire economies are in lockdown mode, and we can expect market recovery only once these economies get off the ground and running again.
That said, here's how you can continue to stay invested in a bear market and make the best of an uncertain present-
Research, research, research
Since the lockdown is helping us all stay indoors with plenty of time on our hands, it might help to research past bear markets, to see which stocks, sectors, or assets actually went up or held their own when the markets were crashing. Such a study will help you identify stocks you can pick when the market nears the bottom, or starts picking up again.
You could focus on sectors like precious metals, defensive stocks (food and personal care) utilities, real estate, or health care. Start identifying sectors you think might start doing well soon, based on analysis provided by platforms like ICICI Direct and keep aside funds for these.
Rotate and diversify
Do not be tempted to sell so that you can cut your losses, because you will inevitably be selling at rock bottom prices. There is no guarantee that you will be able to pick up stocks once the rally that will happen after the crash starts because you could be afraid of another reversal.
The best thing to do is to diversify and use a sector rotation approach. Unlike a bull run, when companies like auto and hi-tech do phenomenally well, a bear market in a struggling economy will see stocks tied to human need, known as defensive stocks, do better. Food and beverages, medicines and utilities are the sectors that will keep doing well in this phase.
Use margin and call options judiciously
Margin trading can be a powerful tool, when you use funds from your broker to invest speculatively. In a bear market, timing your margin trading can be tricky but if used judiciously, can turn the tide in your favour. You can also use the call option when you feel the markets are beginning to rise. But call options are a derivative, and have a finite shelf life; so you need to time your calls prudently. This can be particularly helpful if you are placing your risks on a company that has taken a beating but is poised for a rebound on the strength of solid sales, profits and performance.
Patience pays rich dividends
If you are already invested in the markets, and have a long way to go before retirement or needing funds for any of your life goals, a bear run should not affect you much. Good stocks usually come out unscathed at the end of the bear market, and will give you good returns so there is no need to panic sell.
On the other hand, if you have surplus cash in hand (apart from a six months' buffer that you should ideally keep on hand during current circumstances), bear markets give investors a great opportunity to buy stocks that are on sale. Although you do run the risk of the stock dipping further, if it is something you want to own for a longer period of time, the temporary setback will not hurt you financially. Using the mantra 'buy low and sell high', you can use the bear market to pick up stocks that you can sell when the market turns to make a neat profit.
Do not let go of your SIPs
Investors tend to withdraw amounts parked in systematic investment plans (SIPs) during a bear market fearing loss of their value. However, SIPs function on the principle of rupee cost averaging – which means you can buy more units when the prices are low. Over the long term, staying invested in SIPs will give returns comparable to well performing stocks.
Basically, ‘not doing anything’ is not a good approach during a bear market run. Now is the time to have a long, hard look at your portfolio, assess your funds in hand, and stay invested for the long run. This way, you can stay safe – not just at home, but on the stock market as well.
ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.
I-Sec is a SEBI registered Research Analyst having registration no. INH000000990. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.
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