Money
How to survive in a bear market
Summary
- On an average, it takes around 30 months for a bear market to end but the one in 2020 was short-lived
A bear market is defined as a market that falls more than 20% from its most recent peak. With multiple issues such as the Russia-Ukraine conflict and inflation dogging stocks around the world, major global indices such as the Nasdaq have collapsed into a bear market. The Nifty, however, is still in correction mode and not in outright bear market. It has dropped just about 10% from its recent peak around the 18,500 mark. However, the chances of a bear market for Indian stocks are strong given the huge run-up in stocks witnessed in 2020 and 2021 after the covid 19 correction. In this piece, we explore how you can respond to a bear market. We also give you insights using analysis provided by Anish Teli of QED Capital Advisors LLP.
Temper your expectations
The Nifty rose 16% in the calendar year 2020 and 26% in the calendar year 2021. However, it has given up some of those gains in 2022.
In a bear market, you can no longer expect double-digit returns from stocks. Your portfolio may rise in value if you are an excellent market timer or trader. However, for most investors, this is unlikely to be the case. Hence you should expect low or negative returns in this type of scenario and meet your goals with other assets such as bonds or fixed deposits. Assets with a low correlation to equity tend to rise in such markets, such as gold.
Be patient
A bear market does not generally end in a hurry. The bear market of 2020 that resulted from the covid-19 pandemic was exceptionally short-lived.
However, on average, it takes around 30 months for a bear market to end, if we look at Sensex data since 1986. If you have short-term goals that need money in the next 1-3 years, a bear market is unlikely to help you achieve them. For such goals, debt mutual funds or fixed deposits can work better.
“A decade is a short time in markets. For someone making a 30-year investment, it’s 1/3rd of your investment period. Markets can have lost decades: the ’90s for Indian markets and the 2000s for US markets. So focus on asset allocation. And know that returns can be very lumpy and markets can go sideways for years," said Anish Teli, founder, QED Capital Advisors LLP.
Stay away from the noise
Both conventional media such as business channels and social media tend to amplify short-term movements in the markets and the causes of those movements.
Doing so attracts viewers and hence there is an inherent incentive for them to do so. However, this can also cause you to panic or develop a fear of missing out (FOMO).
“Every time there is a big fall, the media has a field day. Television screens are filled with red tickers and anchors get agitated and announce the end of the world and headlines scream that billions of dollars of market capitalization have been wiped out in a single day. The market corrects once a day but a flurry of headlines, tweets, and WhatsApp messages among multiple communities makes it feels like 10 cuts would’ve happened consecutively. Chances, though, are that if you pick one of these days and ask anyone to recount the details even a year down the line, they wouldn’t be able to do so. In the graph of market ups and downs, such days are just data points that fade with perspective," writes Radhika Gupta, CEO, Edelweiss Asset Management Company (AMC), in her book Limitless that was released recently.
There have been numerous bear markets in India’s history. These include the great recession of 2008, the stagnation and high inflation era of 2010-2013, and shallower bear markets such as 2015-17 when demonetization and GST implementation affected economic growth. Investors must learn to weather such markets and not be discouraged. In the long run, stocks make up for their years of stagnation by rallying sharply in bull phases.
