Safe Investment Strategies for Bear Markets

Picture a ship sailing in a stormy sea, about to encounter turbulent waves. That’s how investing in a bear market can feel like, provided you’re looking to hold on to your assets. It’s easy to succumb to the feelings of uncertainty and the fear of losses in such scenarios. Plus, with the recent news of investors worrying about 90% losses in the next bear cycle, you may already be feeling discouraged. But fret not; equip yourself with suitable information and strategies that can help you protect your investments. Remember that there is also the possibility of making a profit once the market recovers. let’s take a look at the concept behind a bear market, the impact it has on investors, and some investment strategies worth considering during such troublesome periods.

What is a Bear Market

A market that witness de-growth of 20% or more in all the leading stock indexes for a sustained duration is called a Bear Market. This market downturn is indicative of widespread pessimism among investors. It is often driven by factors like geopolitical events, economic recessions, and major policy changes enacted by the government.

A good example of a bear market would be the 2008 financial crisis. The benchmark index in India, the BSE Sensex, came down rapidly to 8,000 points (October, 2008) from 21,000 points (January, 2008). This huge fall was accelerated by the global financial crisis. This led to widespread panic among market investors, thereby impacting the Indian economy as a whole.

How Does a Bear Market Affect Investors?

From the example mentioned above, it is clear that bear markets can be a difficult period for investors. Here are some things that may have to deal with as an investor:

• A sense of panic and negativity among investors
• Potential for a cycle of losses
• Investment portfolios suffer from severe losses
• A temptation to sell assets to cut down on losses
• Lower market confidence and liquidity levels which make it tougher to find buyers
• Many often sell at a loss, especially if they ungently need to liquidate their assets

Safe Strategies for Investing During a Bear Market

Here are some tried-and-tested strategies for deploying investments in bear markets.

• Re-Examine Stock Investments - In a bear market, the first thing you should do is review your investments and check whether they are still relevant or not. Analyze the risk that you can take in the short to mid-term, your financial goals, and the overall investment horizon. Then, consider moving money into assets that have done relatively well in earlier bear markets, including bonds and stocks that have a history of paying steady dividends.
  
  For instance, if you’ve been heavily focused on high-growth stocks that are vulnerable to market movements, consider shifting to safer assets that generate reliable income. This will help you safeguard your portfolio from further losses.
• Manage ULIPs Smartly - Unit Linked Insurance Plans (ULIPs) are financial products that combine market-linked funds with life insurance. If you have invested in a ULIP, you can easily change your fund allocation strategy to avoid losses during the bear market. shift to a higher proportion of debt funds rather than equity funds. Debt funds offer lower returns but are far more stable. This means that you will continue to generate some income even during a downturn. You can shift back to equity funds once the market recovers to cash in on emerging opportunities.
  
  A strategy of rupee-cost averaging will help you benefit from volatility in the market. Through small but regular investments, you will be able to buy more units at lower prices. This averages out the cost per unit once the market starts to regain its momentum.
• Portfolio diversification is worth considering - Diversification is always a good way to mitigate risks. A portfolio that is diverse will naturally cover multiple sectors and investment options. You will have a buffer against market downturns if your investments are spread across various assets such as bonds, shares, real estate, gold, and so on. Some of these investments may also do well during a bear market.
• Check How Your Mutual Funds are Doing - If you’ve invested in mutual funds, check how they are performing. If there’s only a temporary blip in performance, then stay the course and resist the temptation to sell off your fund. Rather, hold onto your investment, and you will benefit when the markets rise again. Of course, if there’s a fund that has been performing poorly for a sustained duration, then consider changing/swapping funds after consulting your financial advisor.
• Hedge Against Volatility in the Market - How can you hedge against market fluctuations? You have to start adding positions which can help you offset potential losses in your primary investment arenas. Futures and options are some examples of instruments that you can use in this regard. They are stock derivatives that allow trading a stock asset at a predetermined price on a later date, hedging market risks by locking in the price beforehand. Going for put options, for instance, will see you hold rights to sell a particular stock at a particular price. If the performance goes down for the same, exercising this option will naturally restrict your losses. Also consider a scenario where some assets move in opposite directions to those followed by the stock market. Fixed-income assets and even gold may help you shield your portfolio against volatility, while preserving the value of the investment during these times.
• Choose a long-term view of things - Although they are problematic, bear markets are usually short-lived. You can always have a long-term approach towards earning returns from your investments. Those who retain their investments normally benefit from the eventually rise of the market. You should thus have a long-term investment goal and avoid panic selling your investments at losses.

Conclusion

Bear markets, just like bull markets, are inevitable consequences of the fluctuating nature of the market. Volatility and losses are common, and you should not panic at the first instance of a downturn. Stay firmly invested in your ULIPs and other long-term investments to reap the rewards when the markets start rising again.

Preparing for these market trends and having a proper strategy will ultimately propel you towards success. You can ensure your wealth growth by taking professional financial advice, re-thinking your portfolio, diversifying into safer avenues, and adopting a long-term investment approach.

 

Swati Tumar - Travel & Finance Writer

Swati is a Writer in the day and an illustrator at night. Among her interests, she is quite fond of art and all things creative. She often indulges herself in creating doodles, illustrations, and other forms of content. She identifies herself as an avid traveler and shameless foodie.