What to do when bears growl: Here are three tips for investors

Highlights

• Global markets are currently trading on a choppy note.
• The S&P 500 dived into the bear market territory early this week.
• The ASX 200 has now declined more than 11% since the start of the year.

Global markets and bonds are currently gyrating on a choppy note amid fears of stagflation, which has muddied the global economic outlook. Additionally, with traders starting to price in more price hikes during the year to tame rising consumer prices, bears have suddenly started to take over the stock markets.

With the S&P 500 diving into the bear market territory early this week, the two-year bull run on Wall Street may soon end. A bear market is defined as a fall of 20% or more from recent highs. It can also be implied as a symbolic psychological hurdle for investors, often pointing towards a recession.

Coming to the ASX 200, the Australian benchmark index has now declined more than 11% since the start of the year, giving away all the gains made during the calendar year 2021.

The weakness is not confined to the stock markets alone. Even the highly risk-sensitive crypto community has felt the pinch. The price of most popular cryptocurrency bitcoin fell 19% this Monday to its lowest level in 18 months.

Having said that, let’s explore what should investors focus on during a bear market.

Don’t sell right away

Most investors tend to pull out their money from the markets to avoid further losses as soon as they see their portfolios turning red. But it’s not advisable unless you absolutely need that money.

In fact, veteran investors treat bear markets as fantastic opportunities to build wealth in the long term. Seasoned investors always know how to handle these swings and they focus more on growing their money during such times.

Most people panic as bear markets bring with them lots of negativity, which can negatively impact psychologies of investors. Also, the markets have always bounced back from every bear market. There is no point bringing emotions while making investment decisions. So, be calm as “tough times come and go, but tough people carry on.”

Reallocation and diversification

Smart investors either hold cash or reinvest in more stable financial instruments to trim their exposure in equities as soon as they sense bears approaching. But it is a bit of a gamble too as you can miss out on the gains by selling all investment holdings once the market rebounds. So, you should tread ahead with proper planning and advice.

You can also spread your investments among equities, debt, cash, and other financial assets. You should consider your risk tolerance, time horizon, and goals before planning for diversification.  A similar diversification strategy cannot be applicable for all since every investor has a different mindset, risk appetite, goals, and strategy.

Dollar-cost averaging

Long-term investors can also bank on the dollar-cost averaging strategy during bear markets. Investors can buy shares irrespective of price and end up buying shares at a low price when the market is bearish. The cost would ‘average down’ as the time proceeds. This way, investors can eventually have a better overall entry price for their shares.

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