As an investor, it's essential to understand that the stock market is naturally cyclical and can experience both bull and bear markets. The equity markets have a tendency toward volatility. As a result, risk and return for stock market investments are closely correlated. Retail investors find it challenging to forecast and profit from bull and bear markets. Retail investors frequently take the biggest hit when bulls take a break. They become panicked as a result of market corrections, downward moves, or rollercoaster swings.
Following are the strategies discussed in this blog that help you sail through the bear market pain and enjoy the fruits of the following bull market.
What is Bear Market?
Investors face a lot of uncertainty during a bear market (a decline of 20% or more). On average, bear markets hit the Indian stock markets every three years. The US stock markets are in a similar situation. However, every bear market is followed by a bull market and a new all-time high A bear market in India historically has lasted an average of eight months. But the bull market that follows typically lasts for two to three years. As a result, when the next bear market comes, investors need not be alarmed.
Phases of bear markets
There are typically four stages to a bear market.
FIRST PHASE :
High prices and positive investor sentiment characterize the first phase. Investors start to withdraw their money from the markets and take their profits as this phase comes to an end.
SECOND PHASE :
The second stage is characterized by a sharp decline in stock prices, a decline in trading activity and corporate profits, and a decline in previously strong economic indicators. As sentiment starts to decline, some investors start to panic. Capitulation is the term for this behaviour. THIRD PHASE :
The third phase shows speculators start to enter the market, consequently raising some prices and trading volume.
FOURTH PHASE :
Stock prices continue to decline in the fourth and final phase, but slowly. Bear markets begin to give way to bull markets as investors start to once again become attracted to low prices and positive news.
Strategies for Bear Market
Smart investors understand that this can actually be an opportunity to make money, whereas many investors panic during a bear market and sell their stocks at a loss. Here are some strategies for profiting from a bear market.
Invest in high-quality stocks:
Almost all stocks will experience a decline in value during a bear market. Some businesses, though, might be in a better position than others to weather the storm. Find businesses that have strong fundamentals, such as steady earnings growth, low debt levels, and capable management teams.
Keep cash on hand:
Having cash on hand can give you peace of mind in uncertain times and enable you to take advantage of buying opportunities when they present themselves.
Diversify your holdings:
It's crucial to have a portfolio that is comprised of a variety of assets, such as bonds and real estate. During stock market downturns, this can help reduce risk. Consider the bullion market, which has been on fire for the last three sessions while equity investors have suffered sizable losses.
Avoid attempting to time the bottom:
During a bear market, no one can predict with certainty when the stock market will reach its lowest point. Focus on investing a portion of the capital during each significant dip rather than trying to predict the bottom precisely.
During a bear market, investors should avoid panic and instead view this as a chance for future gains if they approach it strategically by investing in high-quality stocks. Maintaining good portfolio diversification practices and having enough cash on hand for unforeseen events both greatly assist.