As the recentequity market conditions are posing a threatofanintense crisis in the financial markets.The recent event of record sell-off from the investorsin the financial markets has been one of the scariestevents in theglobal financial markets. Investors have been in a state of flux and surrounded by heavy ambiguity as well as pessimism in these times.
Fresh speculations in the market are surfacing relation to the bearish market,and it’s longer than the expected duration. But investors need not worryaboutthe events where markets have declined multiple folds asbearish marketsoften pose an opportunity for the investors to acquire value companies when their stock is on sale.
A market is said to be in the bear zone when it dives down by 20% from recent highs.
As Warren Buffet has rightly said,
“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it”
Investors canbenefit from the declines in the market,keeping in mind a few pointsabout investing in times of the bear market. Moreover, long-term oriented large-scaleapproaches focusing onbusiness value-based investment focusingon strong fundamentals and intrinsic business value, rather than the share price alonecan prove to be asaviour for the investors.
Let us talk about a few tips that an investor can consider while investing in the bear market.
Maintaining a Quality Portfolio
Finding and investing in quality companies and assets might be a challenge for the investors in the current times asinvestor sentiments remain down along with high ambiguity in the market. Investorsare bound to struggle in finding quality companies to invest in by simply looking at the stock prices. It is because the quality investment is not characterised by the stock prices alone but has a lot more to do with other aspects of a business.
In a bear market, a quality portfolio comprises of assets that have the potential to deliver advantage from theirdepressed prices and turn out to be afundamentally stronger business. A quality portfolio includes identifying value stocks of companies with the characteristics of good businesses with a strong balance sheet, dividend-paying capacity, earnings stability, operating efficiency etc.
Setting a goal prior to making an investmentis a requisite for laying a strong foundation fora successful investment. Duringsignificant timeslike bearish market, an investor should keep aside all scepticism following from the pessimism in the market.
A clear vision of investment,coupled with investment in quality assets, can help the investor have an easy ride through the market turbulence. Investors may want toensure steady incomes at the time of retirement. This is possible only if the investor plans develop a long-term approach with a sound decision regarding the amount of capital invested, amount of net annual earnings on the invested capitaland the number of years or period of your investment.
Diversify Your Investments
Diversification is said to defend the volatility in the various financial instruments. A non-diverse portfolio is more prone to the volatility in the market, while a diverse portfolio shields the investment from the volatility occurring in the certain type of instruments in the market. The gains in one type of investment are likely to offset the losses occurring due to fluctuations in another type of investment.
In current times of high uncertainty where markets are highly volatile, picking up stocks at lower prices can boost an investor’s portfolio’s diversification that includes a mix of different assets like stocks, bonds and index funds.
A common characteristic of sound and prudent investment is that it comprises ofstocks of dissimilar companies in diverse industries, at times in different countries as well. This ensures that a single unfavourable event does not influence the complete earnings of the investor.
In the current bearish market, investors need to carefully choose betweenthe various assets available for investment that ensure protection against industry-specific or country-specific investments.
Risk Tolerance Ability and Asset Allocation
For an investor, a bearish market is a good event to assess theability to tolerate the risk of his/her investment portfolio,whether the risk tolerance is high or low or just right. An intelligent investor would have invested on the basis of an estimated risk tolerance ability of the asset in which investment is made.
A higher risk tolerance ability of the asset allocation means that a bearish market isa good time to intensify your existing asset allocation. In this scenario, an investor might not be able to find an investment option with the lowest valuebut is highly likely to find a better price than the one that was available at the previous market top.
Controlling Your Emotions and Cost of Your Investment
Skyrocketing markets can pumpan investor’s emotions and may lead to animpulsive decision resulting in an unwanted burden on the investor. On the other hand, tumbling markets may win over the emotional control of an investor, and we might experience a situation of heavy sell-off.
The recent sell-off that wiped away trillions of dollarsfrom investor’s wealth was fuelled by low investor confidence due to the uncertainties surrounding coronavirus pandemic. Keeping control over one’s emotions is an integral requisite for a prudent investment.
Likewise,an investment may be yielding good earningsfor an investor while the same investment may not be that lucrative for another investor. This generally happens between the investor and his advisor, where the advisor earns more, and the yield for the investor is generally lower.
Paying a high fee for managing investments may put a significant burden and reduce the earnings for the investors. A close assessment of cost and earnings is a must for investors to ensure low cost at a time when investors are going through a bearish market.
Pay heed to investments and Postpone Major Purchases
Bear markets are considered as a great time for the investors as these times of low stock prices tend to deliver long-term investing gains. A prudent investor wouldput more money in a bearish market as there are high chances for the market to rise in coming times. Citing this lucrative opportunity, an investor is likely to put out his plans of upgrading his car or home on hold and focus in gaining from making a wise investment during bearish market.
Given the above six points, an investorshould not be sceptical of the market falling further but should rather focus on identifying the avenues in the current market scenario andtake advantage of the same.