Are you worried about an economic recession? Do you panic seeing a market downturn? What are your actions as an investor in a bear market?
Many investors are spooked upon seeing markets in a sea of red happening too often and too regularly. This is especially so for newer investors who have yet to go through a market recession in the past. Even our own MyPF members Investors Kopitiam chat group (main purpose: discussing investment related topics including Malaysian and US share markets, other investment asset classes, and good investing principles) has been largely talking about negative sentiments and foreboding market news of late.
Recession: a period of economic decline typically identified as 2 consecutive quarters of falling GDP.
However, a market correction is a normal part of an economic cycle as every economy goes through a period of expansion and recession. The general consensus is that we are in a period of early recession, or also known as the “trough” phase. Expansion will naturally lead to a time when an economic slowdown occurs. But as surely as the sun and moon appear daily, the economic cycle will continue. The stock market is a leading indicator of the economy meaning that the stock market predicts the economy reflecting an upcoming recession.
Investing sentiments have also been largely negative as we see US (and other) central banks raising rates, a flattening yield curve, and in Malaysia we see negative political/economical worries. More technical traders have observed that the S&P500 200 has closed below the 200 day moving average.
Expecting the Unexpected
It is only the beginning of a bear market and one should expect a period of negativism daily in terms of share price movements, news, and from your fellow investors. A typical bear market lasts about 1.5 years and prices fall on average about -40%.
Bear market: a time in the market where prices fall and there is widespread fear and pessimism.
You can by viewing this bear market period from different perspectives as an investor, depending on your investment worldview.
What does your investment lens tell you?
- I am fearful to invest as the market is unstable.
- I am worried seeing the value of my investments fall.
- My confidence as an investor is low and I would rather keep my money out of the market.
- More money is made during a bear market than a bull market.
- A bear market is temporary and short, a bull market will certainly follow.
- It is the time to buy when the market is cheap to pick up excellent companies at bargain prices.
Trivia: Did you know that bears and bulls were used to made to fight one another as a spectator sport in ancient Rome?
You, Grabbing the Ball
The ball is in your court as an investor and you decide on how you want to play out this period. If you’re an investor, you should (hopefully) be invested in shares with strong fundamentals and have your personal investment plan in place. It is now imperative for you to stick to your personal investment plan which helps you ride through the wave of emotions that accompany a bearish market. And if you have plenty of cash on hand, you have the resources to take advantage of excellent investment opportunities. Your investor psychology is the key to your success!
“Eighty percent of the market is psychology. Investors whose actions are dominated by their emotions are most likely to get into trouble.” ~ Adam Smith, The Money Game
As a long-term investor, time is your friend and a bear market is likely to be only a short period of time compared to your entire investment time frame.
- If you believe a good existing shareholding is going to drop in this bear market, you can consider exiting and then picking up the share again at a lower price. Don’t totally miss the boat though if you do this.
- Buy shares on your watchlist that are now attractively priced within your buy-range. Buy over a period of time on the way down and not all at once as prices can and will continue to fall during a prolonged bear market. The market is always cyclical and you may see temporary rallies in a downtrend (i.e. bullish harami pattern).
- Continue to increase your existing shareholdings to dollar cost average down when opportune at strong support levels. A strong support level is a point where demand is there helping to prevent prices from falling much further.
- Look for large-cap/defensive/strong dividend shares which will likely fall less during a bear market. As a bonus, you get to enjoy the dividends throughout the bear market and into recovery.
- Use your cash holdings to start buying when the market has finally reversed and is starting to pickup again. Patience in this case can be a virtue.