The stock market is notorious for being volatile even if there isn’t a pandemic or an international conflict going on. This volatility is known to bring periods of continuous highs, which investors call a “bull market”.
Investors love the bull market because making money becomes relatively easy. On the flip side, the stock market can enter a period of sustained lows where investors can end up losing a lot of money. This is called a bear market.
What Is A Bear Market?
A bear market generally represents a fall of 20% or more from the recent highs. The term can be used in the context of an index or a stock given that the caveat of 20% in the red is met.
There’s another popular term called “correction” that you may have heard of. It is often used interchangeably with “bear market” although the two are not the same thing. A correction is a drop of ~8-10% in an index or stock as opposed to ~20% when it comes to a bear market.
Either way, investing when the markets fall continuously isn’t easy. Even stocks with solid fundamentals are known to fall during such times, confusing investors and leading to bad decisions like selling winners.
Furthermore, it is important to note that “bear market” isn’t exactly a scientific term. In fact, several prominent investors like Nassim Taleb steer clear of using it. That said, it is a convenient heuristic, especially for the regular investor.
Examples Of A Bear Market
1. 🇮🇳 1992: Caused by the manipulation of Harshad Mehta, BSE dropped from 4500 to 2500 and led to a loss of ₹1,00,000 Crores.
2. 🇮🇳 2004: A foreign institutional investor called UBS executed excessive selling orders for anonymous clients. BSE lost 842 points because of it.
3. 🇺🇸 2000: Infamously known as the “dot-com crash” causing Nasdaq to fall by 75% from its high by the end of 2002.
4. 🇺🇸 2008: Termed as the subprime mortgage crisis that led to the fall of several US banks. The S&P 500 lost more than 50% by the end of 2009.
5. 🌐 2020: Markets from around the world crashed due to the covid-19 pandemic in March 2020.
Fun fact: One of the earliest bear markets in recorded history transpired in the Netherlands (formerly Holland) back in 1637. It was known as the “Tulip Mania Bubble” where the price of tulip contracts reached exorbitant levels and then suddenly crashed.
How To Invest In A Bear Market In India?
Truth is, a bear market is tough because there’s a lot of money being lost on paper. But it also presents an opportunity that savvy investors are known to capitalize on. Read on to know how to invest in a bear market in India.
1. Stay Patient And Think Long Term
Panic selling is a part and parcel of a bear market, regardless of the geolocation. The act itself is understandable - people don’t want to lose money so they cut their losses and live to fight another day.
However, panic selling during a bear market could be one the biggest mistakes you can make as an investor. The reason is rooted in data and what is to be understood from it. See the graph below.
Imagine Mr Bean invested in an index fund, made decent gains, and the 1st lockdown hit. Mr Bean panicked and sold the index fund. But what Mr Bean didn’t realise is that markets are known to bounce back in the long term.
As evidenced by the graph below, being patient and thinking long term would’ve helped Mr Bean generate more wealth for his future goals without the burden of capital gains, timing the market, and other stressful factors.
2. Don't Cut Your Winners
We’ve explored why panic selling should be avoided. Another reason why it is detrimental to wealth creation is that you may end up selling winners or companies that have and will have a strong balance sheet for years to come.
If you’ve got the assistance of a trained financial advisor, this may not necessarily happen. But if you’re investing on your own and are bogged down by all the noise, then there’s a real possibility that you may cut your winners.
An antidote to this is to ask yourself why you’ve invested in the stock and whether the stock can stand the test of time. If the answer to both questions is positive, you may want to hold on to your winners.
Moreover, a bear market is one of the best times to understand the losers in your portfolio as many companies may struggle or even go out of business during tough economic times.
3. Turn To SIPs
A Systematic Investment Plan (SIP) requires you to invest every month. Another reading of this could be that a SIP requires you to invest during every market phase. That is, you invest in the bear market and the bull market both.
This design of SIPs leads to rupee cost averaging, which means you can buy more (stocks or MF units) when there’s a bear market and less during a bull market, the result of which averages your holdings.
That’s why SIPs are considered to be a great tool for investing during bear markets. But, the caveat is that you must invest in winners whether it be stocks or mutual funds.
4. Diversify Your Portfolio
Investing in a bear market doesn’t necessarily mean buying stocks or mutual funds. It could also mean adding non-market linked assets to diversify your portfolio.
There are certain investors who already know this and prepare for bear markets well in advance. Others might need the bear market to arrive and nudge them to explore non-market linked assets like:
Diversification of this kind is known to be helpful because it serves as a hedge against volatility. It also means that you can benefit from India’s new-age fixed income products that generate passive income. More on that later.
5. Don’t Time The Market
“Timing the market is a fool’s game, whereas time in the markets is your greatest natural advantage.” - Nick Murray
Not many have won when trying to time the market. In fact, most investors are known to underperform against stock indices precisely because they try to time the market.
Why? Because of the amount of research, pressure, and bad decisions that it can lead to, especially when it comes to investing in a bear market. Instead, the focus should be on staying invested in the right assets during a bear market.
Furthermore, if there is the temptation to buy the dip, which may not always be the best thing to do, you should consult a trained financial professional or a Cube Wealth Coach who has been in the game long enough to help you put your extra money to use.
What To Invest In During A Bear Market In India?
Stocks have been known to generate lucrative returns over the long term. That’s why they are a potential option to invest in during a bear market. The trick, as seasoned investors tell you, is to invest in the right stocks.
Because not all stocks are winners. Take for example Reliance Power which had one of the biggest IPOs. It ended its debut day on the Indian stock market at ₹240 back in 2008. As of 01-03-2022, it is trading at ₹13.10.
2. Mutual Funds
Mutual funds pool money from several investors and a manager who heads the fund invests the money in various stocks and bonds. During a bear market, you can buy more units of a mutual fund.
This can help you in your wealth creation goals. Furthermore, mutual funds are known to be less risky than stocks and also give you the option to invest via SIPs, a tool that leads to rupee cost averaging as discussed above.
Here, again, the trick is to invest in the right mutual funds based on your wealth creation goals, risk appetite, affordability, and other factors. A Portfolio Planner Wizard can make this process easy, especially when investing in a bear market.
3. P2P Lending
Peer to Peer lending or P2P lending helps lenders loan money to borrowers directly through a marketplace. The idea is to cut out the middleman like banks who take up most of the profits.
P2P lending is known to generate predictable returns across a fixed lock-in period. The returns may vary depending on which platform you use and on Cube, it varies from 8.15% to 12%. Cube’s P2P lending partners include:
Asset leasing allows you to invest in physical assets like cars, equipment, furniture, and others that are leased to creditworthy corporations for a fixed period of time.
This generates a fixed source of income. On Cube, Asset Leasing by Grip generates up to 12% post-tax returns with recurring payouts that can serve as a source of passive income.
Cryptocurrencies are digital assets that are built on the blockchain. They’re decentralized coins or tokens that have generated lucrative returns over the past 3 years, the most famous of which is Bitcoin.
Cryptocurrencies are known to offer greater autonomy over money and have also been accepted as a form of payment by several big brands like Microsoft. The crypto market is also famous for popularizing the phrase “buy the dip”.
While not exactly devoid of the trends of the stock market, experts believe that cryptocurrencies have shown promise and can be assets for the future in the real world and the metaverse.
That said, cryptocurrencies are nascent assets that are prone to rampant volatility so it is best to evaluate your risk profile before investing in crypto during a bear market.
Bear markets are uncomfortable for many investors but can be leveraged to make smart decisions like cutting the losers, buying more winners, getting a portfolio review, diversifying your portfolio, and more.
Finally, it is important to remember that panic selling can seem foolish in hindsight so it is best to consult a trained financial professional who can help you make the right decision when investing or selling during a bear market.
Note: Facts & figures are true as of 01-03-2022. None of the information shared here is to be construed as investment advice. Exercise caution when investing in assets like stocks, mutual funds, alternative investments, cryptocurrencies, and others.
Curious about personal finance and all things money. Can either find me reading a book or dancing to a tune.
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