If you’re investing for the long term, bear markets are something that you’ll experience several times throughout your investing horizon.
So knowing how to react during a bear market is important in order to ensure that your investments make it through these tough periods and possibly even flourish after that.
Given that we’re currently in the midst of one, I thought it was apt to share my thoughts about this now.
Each of us may have different investing goals.
Those with more capital and who are older in age may be more concerned about wealth preservation.
Meanwhile, those with less capital and who are slightly younger like me are likely to be more concerned about wealth accumulation.
Regardless, no one’s investing goal would be to lose wealth, so let’s take a look at how we can avoid that.
One of the most common ways that people lose money during bear markets is by panic selling.
This often refers to a time when you sell off an investment when its price drops significantly out of fear that it would be unable to recover or in an effort to preserve whatever capital we have left.
The motivation behind this is to ‘cut losses’.
While cutting losses isn’t bad in itself, the issue is more about the fact that the decision to sell is driven by emotion rather than analysis or logic.
This often clouds judgement and prevents us from making sound decisions.
When we panic sell, we are immediately realising the losses in our investments, causing us to lose money.
If the investment that we sold off subsequently recovers, we don’t get to earn the profit that we would have made if we had held on to it.
But what triggers panic selling?
Usually, it’s when we see our portfolio take a hit in value that’s more than what we’re comfortable with.
In other words, we were taking on more risk than we should have been.
It can also be fuelled by negative economic news or speculation which heightens the sense of fear and anxiety that we might feel.
Now, let’s look at what we can do to get through a bear market and come out stronger.
1: Reevaluate Your Risk Appetite
If you haven’t experienced something firsthand, it’s hard to figure out how comfortable (or uncomfortable) you might be in that specific situation.
It’s no different when it comes to your risk appetite for investing.
Chances are that when you first started investing, you didn’t really know how much risk you were comfortable bearing.
You probably made an assumption about your risk appetite after considering various factors like how you typically react to risk in your day-to-day life, your relationship with money, your investing horizon, etc.
But you never really got to find out whether your actual risk appetite measures up to your perceived risk appetite – until now.
It’s important to know your risk appetite because this ensures that you’re comfortable with the amount of risk you’re bearing.
When you know how much volatility to expect in your portfolio, it helps to reduce the risk of panic selling when you see your portfolio performing poorly.
In today’s bear market condition, most people’s portfolios have taken a considerable hit, and yours likely has as well.
If it’s your first time experiencing such market conditions since you’ve started investing, this is the perfect opportunity to find out how comfortable you really are with risk.
All it takes is one question: how has the current bear market affected you?
If you’re constantly checking your investments, feeling anxious about losing money, or losing sleep because of your investments, you might be taking on more risk than you’re able to bear.
Moving forward, you’ll probably want to tweak your portfolio and reduce your risk exposure so that you can continue investing without feeling the weight of such financial stress.
On the other hand, if you find yourself unfazed by the poor market conditions and are able to go about your life as normal, you’re in a good place.
You’re either taking on just the right amount of risk in your portfolio or even comfortable enough to take on more risk.
You can consider increasing the risk level of your portfolio slightly if you think your current portfolio is too conservative.
Doing so has the potential to produce higher returns over your investing period, though it’s not guaranteed that higher risk = higher reward.
2: Adjust Your Portfolio
After determining your risk appetite, it’s time to make adjustments to your portfolio if it’s necessary.
If you realized that there is a discrepancy between the risk profile of your portfolio and your actual risk appetite, then you should probably adjust your portfolio accordingly to bridge it.
This will ensure that your portfolio works for you.
To increase your portfolio’s risk profile, you can consider investing in more equities.
My go-to equity investment would be stock index ETFs like CSPX (S&P 500 ETF) or SWRD (World ETF).
While they expose you to equities, they also mitigate some risk by being diversified across hundreds of different stocks, which makes them relatively safer investments as compared to individual stocks.
Of course, individual stock picking is an option as well, but make sure you do your due diligence if you choose to go down this path to ensure that you know what kind of risk you’re taking on.
Conversely, to reduce your portfolio’s risk profile, you can consider investing more in fixed income products like bonds, gold, or even topping up your CPF.
Bonds and gold are investments that are commonly used to hedge portfolios against bear markets because their performance tends to be inversely correlated to that of equities.
So when stocks are plummeting in a bear market, bonds and gold should hold their value or have a net positive return.
This reduces the adverse impact of the bear market on your overall portfolio and can make investing more bearable for you.
Topping up your CPF is a slightly more unorthodox strategy, but it might be the right option for some people.
There are several advantages to topping up your CPF.
Firstly, the cash in your CPF earns guaranteed interest at a rate of 2.5% – 4% per year, which is probably the highest guaranteed rate of returns for any investment with little to no risk of losing your capital.
Next, topping up your CPF allows you to enjoy tax relief of up to S$8000.
So not only does your cash generate returns, but it also offsets the amount you pay in taxes for the year.
Finally, doing so ensures that you are actively working towards preparing for retirement as well since the cash in your CPF isn’t freely withdrawable.
However, this is also the biggest disadvantage of topping up your CPF.
It effectively makes your cash illiquid for ‘X’ number of years, where X is the number of years it takes you to reach the CPF withdrawal age of 55.
Unlike traditional investments in brokerages that can be withdrawn at any time barring some processing time, cash in your CPF basically can’t be withdrawn until you turn 55.
So you’ll want to make sure that you don’t and won’t need the cash if you choose to top up your CPF.
3: Stick To The Process
The next thing you should do is to stick to the process and continue investing.
Now that your portfolio more accurately reflects your risk appetite, you should feel more comfortable about continuing to invest in spite of the bear market.
While it may seem ridiculous to continue pouring money into your investments when they’re doing poorly, it’s not actually so – in fact, it might be one of the best things you can do.
Just think about this for a moment: when was the last time you thought it was a bad idea to buy something at a discounted price when you’ve been buying it at its regular price all along?
In a bear market when the prices of equities are generally lower, continuing to invest simply means you’re getting a better bang for your buck because the same amount of money now nets you more shares than usual, ie more returns than usual over your investing horizon.
As Warren Buffett said: be greedy when others are fearful.
If you make the right moves during a bear market, there’s a chance for you to earn a lot of money from it rather than lose money.
Bear markets are but part and parcel of the economic cycle – they can’t be avoided.
But what we also know about the economic cycle is that bear markets are followed by bull markets and that the market generally trends upward.
This reiterates the earlier point about getting a better deal when you continue investing during a bear market.
However, this is only true if the fundamentals behind the equity that you’re investing in haven’t deteriorated.
For example, if you’re invested in diversified indices like an S&P 500 ETF, you can expect that its price will go up over the years.
But if you’re invested in individual stocks, you’ll need to exercise more caution.
There’s much less assurance that an individual stock will increase in value over the years.
And, if there’s been a significant change or disruption in the industry that impacts the future potential of the stock you’re investing in or thinking of investing in, you’ll need to reevaluate the stock/company again.
For example, say you were invested in airline stocks before the pandemic hit in 2020.
With the travel restrictions imposed, it was uncertain how airline stocks were going to perform in the short term or if they were even going to survive the pandemic.
In that case, you might not want to continue investing in airline stocks for a while until things settle down.
4: Block Out The Noise
Finally, you’ll do yourself a favour by blocking out the noise that is generated by mainstream media and social media.
The reason is that most of the time, these attention-grabbing headlines or posts are unproductive and speculative.
They can instil fear and anxiety in the minds of retail investors like you and me even if they aren’t true.
And when this happens, we are more likely to make poor investing decisions like panic selling in reaction to these emotions which can cause us to lose money.
The fact of the matter is that anyone can make a prediction or throw some shade on some type of investment and statistically, some of them will end up being true.
Nevertheless, the majority of the time, they aren’t true, and if we allow such noise to interfere with our investment plans, it can hinder our investing efforts.
The only time where it can be helpful to keep updated about news is if you’re heavily invested in cryptocurrencies.
Many cryptocurrency projects share updates on Twitter and Discord and given how quickly things can move in this space, being in the know of the latest news can be helpful.
But, as always, there will be much more unproductive news than productive ones, so do exercise your own due diligence.
By blocking out as much noise as we can, we are reducing the chances of letting speculation and negative news get to our heads, thereby minimising the likelihood of panic selling.
To summarise,
A bear market may be tough to tide through mentally, but given how we can’t avoid it forever, we might as well learn to embrace it and prepare for it.
By taking the appropriate steps, not only can we mitigate our losses from a bear market, but it can also allow us to continue investing comfortably and possibly even profit off of it.
What steps do you take in response to a bear market? Let me know in the comments below!