- Date : 19/03/2022
- Read: 3 mins
How to react to a bear market?
The markets are down. What should you do?
A 20% plus drop in the market is referred to as a bear market. A bear market is not easy on the psychology of the investor, and some people sell their shares at the bottom. Here, we summarize the step-by-step process you should follow to ensure that you survive the market downturn.
Keep Your Fears Under Control
There's an old cliché on Dalal Street that goes, "The market climbs a wall of worry." The markets have been going up despite massive economic turmoil, wars, terrorism, financial bankruptcies. This means that finally after the event is passed, markets usually go up and the event feels like a blip when looked at from a historical perspective. The markets have corrected a lot due to the Russia-Ukraine war, but there is a high chance that from a historical perspective, this will look like a small blip.
A bear market is characterized by the erosion of the wealth, and bankruptcies of people who bought shares on margin. A good strategy to survive a bear market is to play dead, or in financial terms, it means buying debt instruments, government treasuries, or shares with deep value rather than growth stocks.
Diversification is used to ensure that you do not put all your eggs in one basket. Sometimes equities perform well, sometimes debt instruments perform well and in other times, commodities like gold and crude perform well. Thus, if you have a diversified portfolio, you are more likely to survive a bear market without panic.
Only invest what you can afford to lose
The old adage is that equity investing is risky, and you should be prepared to lose money. So, this means that your allocation in equity should only be that amount that you can afford to lose.
Look for good value
Even when the markets are overvalued, there are always some stocks that are undervalued, and provide more value as compared to the general markets. These stocks are generally neglected by the markets and offer good value. Usually, when the bear market arrives, these stocks fall less as compared to the general market.
This is a high-risk strategy, and may not suit all investors. If you feel that the markets will go down, you can short the market by borrowing shares, or by buying put options. But, this is a speculative activity, and may not suit most people.
Bear market is risky business, and even strong companies get pounded in a bear market. But, if you have a plan in place, you can profit from bear markets and buy good companies at attractive valuations to profit from market uncertainty.