“You need to know the market's going to go down sometimes. If you're not ready for that, you shouldn't own stocks (equities). And it's good when it happens.”
- Peter Lynch
Bear markets are a natural part of market cycles, not only can you survive them, you can also position yourself to benefit from them.
History has a tendency to repeat itself, but as investors we always hope for a continuous positive outcome and choose to ignore valuable lessons from history. As wealth managers, we’ve seen this time and time again:
1)The retail investor typically deploys larger capital during the last phase of a bull run
2)The so-called long term investor sells equity when the market declines out of fear that it will never come back.
However, data proves the following : Not only do markets revert to previous levels, but they bounce back far sooner than expected.
Historically, bear markets are observed in the foundations of three phases.
Phase I - Excess liquidity starts pouring into already saturated markets, skewing the gap between economic growth and stock markets. We see overinflated prices combined with sluggish economic growth.
Phase II - A single trigger event that could either be domestic or global takes place.
Phase III - Investors that have higher leveraged positions begin to sell-of their positions and book losses- and reinvest into hedging instruments such as gold. Investors panic and desperately run off to sell their holdings without understanding the trigger factor.
Understanding the trigger and the immediate aftermath is key to finding opportunities in a bear market. When in doubt, wait 24 hours before making a decision. This could be a crucial factor in determining the rate of compounding on your wealth.
The good news is that bull markets tend to last much longer than bear markets and generate movements of far higher magnitude than the preceding bear run. To give you some facts, the stock crash of 2007 lasted in a 17 month bear market wiping 50% off the value of the S&P 500. The bull market that followed has lasted over 11 years.
In more recent times in India the Nifty’s recovery has been among the best in Asia despite weak growth data post the pandemic. With emerging markets gradually maturing, corporate governance issues improving, and stricter regulations being enforced we have seen that the time taken to recover from a bear run has drastically reduced from years to months.
There is no secret sauce. It goes back to the trigger and understanding what it means for you. Investing is very personal. When compounding your net worth, a bear market should never stop you from adding to your investment portfolios. In-fact bear markets offer the best opportunity to re-balance your portfolios and get rid of instruments you never wanted in the first place, but somehow they found their way into your portfolio. Think of it as a wake up call. Look at historical data to find the sectors that bounced back the quickest, so that you capitalize and rebalance your portfolio when the tide turns.
Again keep going back to the trigger! The simplest answers will come from here. Dial out the noise - there is a lot of it in a declining market.
Make lemonade out of lemons
Bull and bear markets occur over a sustained period. However, over time, the bulls have prevailed and stock markets have posted positive results over longer periods. Bear markets are often relatively short in comparison. Understanding the trigger and actionable for your portfolio is key to making the most of it. Patience prevails, but the bear market gives you the opportune time to dig deep into your investment portfolio and make key adjustments.
“The investor’s chief problem—and his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave.”
Author: Sahil Contractor (Co-founder — dezerv.)
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