Should I Continue Investing in a Bear Market?

COVID-19 has disrupted people’s lives and livelihoods globally, with millions of cases officially reported worldwide and lockdown measures implemented in many major cities. This has also caused widespread panic in the financial markets, which has translated into heightened volatility and stocks crashing into a bear market.

While there isn’t a hard definition, a bear market is typically characterised by a 20% drop in the stock markets. Bear markets often coincide with broader economic hardships, including economic recessions, reduced salaries and job instability. People’s sentiments are generally poor during this period, leading to a general risk-off attitude towards investing.

According to Investopedia, between 1926 and 2017, there have been eight bear markets. These bear markets have lasted as short as six months to over 2.5 years. During these bear markets, stocks fell by 22% to 83%.

As you can see, even during a bear market, the duration and extent of the stock market crash can vary greatly. Therefore, it isn’t easy to base your investment decisions just on what has happened in the past. However, as an investor, the one thing that all bear markets have in common is that they have all eventually recovered into new bull markets.

What should investors do in a bear market?

According to various news outlets, the COVID-19-led stock market crash in 2020 has been the fastest-ever decline into a bear market. Volatility has also spiked with the US markets experiencing four circuit breakers in its stock exchange to prevent prices from falling too much. In each instance, the market fell by over 7%. The natural question for investors to ask is whether you should continue. Here are some considerations you can use to guide your investment decisions in such situations.

1. Don’t be led by emotions

As markets tumble and become volatile, you may be tempted to act based on your emotions, rather than your initial investment strategy or decisions.

For some, the depressed markets can look tempting to enter at low prices. They may also recall one of the most famous quotes from Warren Buffett: “Be fearful when others are greedy and be greedy when others are fearful.”

Others may not be able or willing to stomach such wild swings in market prices and may be anxious to get out of the markets during a bear market.

In reality, no one can predict when the markets will rise or fall. One thing you can do is stick to your planned investment strategy. If you are investing through an investment-linked plan or a monthly investment plan, you are buying into the market on a regular basis. If you follow through on this strategy, you will likely end up investing at a price that is close to the average price of the asset.

An investment-linked plan, for example, gives you the flexibility to invest as little as $300 a month for between 10 years and 30 years based on your needs. You can also take a premium holiday when the need arises, especially if you are affected by an economic downturn or personal emergency. With plans like this, your investments are spread out over many years and will likely not be affected by a short-term dip in the stock market.

Instead, if you prefer finding value in the markets, depressed prices can offer diverse opportunities to invest in high quality companies at lower prices than just a few months before.

2. Relook your initial investment strategy and decide whether to rebalance

On the flip side of the argument, you need not be obstinate and stick to your initial investment decisions. The fundamentals of the industry or the stock you invested in could have changed because of the crisis, or your original investment thesis could have been wrong in the first place.

Instead of reacting based on emotions, relook your investment strategy before deciding if you should make any alterations.

Another thing you can do is to rebalance your portfolio. When the price of one asset rises much more while the price of another asset declines, you may be left with an asset allocation or diversification strategy that doesn’t match what you initially intended.

3. Reduce exposure to low quality stocks

Saying a stock is low quality does not mean the business is poor or illegitimate. It simply means that the company may be highly indebted, or engaged in speculative or cyclical businesses.

On the opposite end of the spectrum, there are blue-chip companies. High-quality companies tend to also be more resilient by nature and may own a market advantage or have cornered a sizeable market share. These companies typically have strong balance sheets and a track record for navigating economic crises in the past.

On many investment-linked plans, you will have the option to invest in a curated list of funds exposed to high-quality companies that are diversified across sectors and countries. At the same time, you cultivate financial discipline to continue investing in high-quality investments, if you have the ability, regardless of the short-term price.

4. Don’t bet the family farm

With heightened volatility and poor investor sentiments, the short-term returns in the market can be very unpredictable, even for high quality-companies.

If you want to take advantage of the lower prices, there’s no need to go all-in right now. You can invest a smaller sum and continue investing in assets you have faith in on a regular basis. If markets go down, you can invest at even lower prices without feeling a big pinch.

You may also want to refrain from taking on too much leverage as large short-term fluctuations can leave you having to liquidate your position even if you turn out to be right in the longer term.

You may also think now is a great time to load up on safe-haven assets, including liquidating your entire investment portfolio or pouring everything you have into bonds or gold. Again, instead of going all-in, you can take a more measured approach to take profits or liquidate some of your investments, or diversifying into safer asset classes.

5. What goes down must come back up?

When you throw a ball in the air, you know it’s coming back down. If you throw the same ball to the floor, it only comes back up if it is made of the right material.

The same can be said about your investments. While the overall markets may recover, the “particular ball” you own may not recover. For example, if you are invested in a low-quality company or one in a sector that has been battered by COVID-19, it may never recover from it.

Diversify your eggs into various baskets

Diversification helps you reduce the overall risk that you take on. Even if one company, sector, country or asset class is badly affected, your portfolio will remain strong.

When you invest, you are building a nest egg for the long-term. This allows you to take advantage of the long time horizon you have to grow your pot. A monthly investment plan can help you to continue being disciplined in your investments in bull and bear markets. By selecting the suitable, longer-term investment horizon (i.e. more than 10 years), you can prepare for your retirement or other long-term financial goals with less concern for short term fluctuations.

Disclaimer:

This article is for general information only and does not take into account the specific investment objectives, financial situation or needs of any particular person. The views expressed herein do not necessarily reflect the views of AXA Insurance Pte Ltd and should not be construed as the provision of advice or making of any recommendation. There is no intention to distribute, or offer to sell, or solicit any offer to purchase any product. We recommend that you seek the advice of a qualified financial advisory professional before making any decision to purchase an insurance or investment product. Whilst we have taken reasonable care to ensure that all information provided was obtained from reliable sources and correct at time of publishing, information may become outdated and opinions may change. We are not liable for any loss that may result from the access or use of the information herein provided.