The standard definition of a bear market is when major stock indices of the United States, like the S&P 500, drop by 20% or more from their peak. Kavan Choksi mentions that sharp or sustained declines in the market are bound to make investors anxious and uncomfortable. However, there are definite steps they can take during this time to put things into perspective and even benefit.
Kavan Choksi discusses the approach investors must follow in the bear market
A large number of investors lose confidence and rush to sell off their holdings during the bear market. However, this pushes prices even lower, extending the severity and duration of the bear market. It would be a much smarter choice to adopt trading strategies that minimize losses and leverage the opportunities that arise only when prices are falling.
Here are a few pointers one should follow when planning to invest in bear markets:
- Avoid knee-jerk reactions: If the market drops, it can be quite tempting to jump out until asset values start to climb up. But this can lead to costly mistakes. By choosing to sell off the shares when the market has fallen steeply, one would be at risk of locking in a permanent loss of capital. In order to optimize the potential over the long term, one has to get their market timing right. If one simply sits on the sidelines when markets become volatile, they can miss major rallies, which often occur during the early stages of a recovery, ideally over a span of a few days.
- Revisit goals and risk tolerance: It can be frustrating to see the assets decline in value, especially if one was counting on them to fulfill a relatively short-term goal. If one has plans to retire in a few years, it would be a good idea to dial back risk. Investors with longer time horizons can typically withstand market volatility. But if they need to tap investments sooner, they should consider a more conservative asset allocation. Investors should ideally try to diversify their portfolio more broadly, with a good mix of cash and bonds, in addition to stocks.
- Keep investing consistently: As Kavan Choksi says, by investing a fixed amount of money at regular intervals, one would be able to buy equities at more affordable prices. This can allow investors to potentially see the shares rise in value once the market rebounds. By making regular weekly or monthly contributions to their portfolio, investors would be able to keep their returns relatively stable.
- Find strategic opportunities: Defensive stocks, such as shares belonging to companies that deal with consumer staples, healthcare, and utilities offer great opportunities. Stocks of companies with higher-quality businesses and balance sheets are also considered defensive stocks. Investors can also find opportunities in higher-quality stocks that pay dividends, particularly the ones that have historically grown their dividends. This will help boost the total return when stock prices might be falling.
As stock prices decline, one may find high-quality companies trading at discounted prices. Hence, investors should keep an eye out for undervalued assets that have long-term growth potential.
