STRATEGIES TO SURVIVE IN A BEAR MARKET

Bear market comes as a challenge to the investors. Losing money hurts every individual, whether its 100,000 in the market or 1,000,000. This is the time when the declining market tests your patience. If the fear sets in, you might consider releasing yourself from your investment plan completely, which can do more damage than anything else. And, the market itself is not very good at telling investors when to jump in with both feet and when to keep well away from it.
So do you feel like banging your head against the wall? Or, wondering whether you should simply diversify across all asset classes such as equities, debt, mutual funds, commodities etc. Dealing with a future contingency is one thing, and watching the retirement assets evaporating into the air is another.

The two “S” – Strategy for the Stock Market

Crashing markets can be a good thing too, as it provides with an opportunity to get in at the bottom and wait for the markets to rise. This is beneficial for an investor looking to stay on in the market for a longer term and the one who is looking at long-term benefits. Here by ‘long term’ refers to a period of over three years. Many people make money in the short term but one needs to understand that this is generally not the way the equities behave. There are periodic corrections in the market and the investor has to be prepared for the same.

So what exactly the strategy should be to weather gains in a sliding market?

Making the appropriate investment allocation
To better understand how proper asset allocation can add value to an investment plan, first lets have a look at what is it all about? Looking at the investment expanse there are a lot assets (which loosely refers to investment avenues) and as an investor you really don’t know, a) which asset must form part of your plan and b) if it must then how much of it should you own. Which asset you must own gives you a wide choice among the asset classes namely, equities, debt, mutual funds, etc and how much you need to own varies from investor to investor. You might have a portfolio that consists of a number of mutual funds, ETFs, stocks, and bonds. Now, you need to be sure that every asset has a role to play in your portfolio. And equally important is the allocation. If you have taken the time to create an investment mix that is suitable for your risk tolerance and investment objective, then a bear market shouldn’t concern you. For instance, if you have a few decades before you need the money, and you are an aggressive investor, you might be invested completely in stocks. This doesn’t make the difference till the time you understand the fact that with significant gains may come significant losses at times. 
 

Take the benefit of rupee cost averaging
The markets are still to put up a clear picture in place with more troughs than crests. In such a scenario, one needs a careful and a sensible strategy that would minify the cost of buying an investment option and that would in a way act as a shield against abrupt risks. One of the strategies of the kind is called Rupee-Cost Averaging (RCA). RCA in simple terms means investing a fixed amount of money each month into an investment such as a stock, or mutual fund or other investments. In RCA, a certain number of shares are bought regardless of its price. This means more number of shares is bought when prices are low, and fewer shares are bought when prices are high. By doing this, eventually, the average cost per share comes down.
For example, your fixed investment might buy 10 shares when the price is low and only five shares when the price is higher. So here, RCA lessens the risk of investing a large amount in a single investment at the wrong time (i.e. at an inflated price), by taking the average cost per share down in a falling market. This lessening of the average cost per share will help you gain better overall profits as the market moves up in the long term. If the market is lower this month, you may lose money on the shares you bought last month, but this month you receive more shares, which, in the future, will help offset any losses. Regardless of the amount of money that you have to invest, rupee-cost averaging is a long-term strategy. As the financial markets are in a constant state of flux, they tend to move in the same general direction over fairly long periods of time. Bear markets and bull markets can last for months, if not years. Because of these trends, rupee-cost averaging is generally not considered as a short-term strategy….

Profit from falling stocks
Often, investors in a bearish market get their money placed in fixed return instruments such as bonds or debt mutual funds because they pose less of a risk. Now as the money is withdrawn from the stock market due to stock sales, the supply exceeds the demand and the prices of the stocks are further driven down.
On the other hand, bear markets do offer some great benefits because they provide the investors with an opportunity to buy into stocks at bargain prices. When the prices drop, often substantially, before recovering, it presents the investor with an optimal buy in at a low price. However, investors should be prepared to take a short-term loss as prices dip just before the upward turn.

Consider defensive stocks
It would be wise to look at the experience of renowned investor, the late ‘Sir John Templeton’. His investing mantra was simple: “Buy at the point of maximum pessimism”.
The investors who look forward to maintain positions in the stock market should adopt a defensive strategy. This type of strategy involves investing in larger companies with strong balance sheets and a long operational history, which are considered to be defensive stocks. The reason for this strategy in place is that these large stable companies tend to be less affected by an overall downturn in the economy or stock market, making their share prices less sensitive to a larger fall. With strong financial positions, including a large cash position to meet ongoing operational expenses, these companies are more likely to survive downturns. These also include companies that service the needs of businesses and consumers, such as food businesses (people still eat even when the economy is in a downturn). On the other hand, the speculative companies with not much growth happening are the ones to be kept off from your reach because they are less likely to have the financial security that is required to survive downturns.

CONCLUSION:
Investing in a downturn is actually not that different. But it takes tremendous courage to buy when there is widespread gloom and panic around. Therefore, one needs to take care of the right investment mix between wealth-growing but volatile investment avenues, such as shares, and wealth-protecting ones such as bonds or bank deposits, mutual funds, etc. What is unusual in this case is that it becomes very difficult to follow a disciplined strategy when markets are going haywire. Investing in such times becomes a test of your character as much as of your intelligence.

           “You may make most of your money during a bear market; you just need to realise it at the time.”