Your bear market survival guide

There are steps you can take to make sure your portfolio survives (and even thrives) until the bear transforms into a bull.

The S&P 500 briefly fell into a bear market on May 20, 2022, dropping 20% from its last record high in January 2022.

The words “bear market” strike fear into the hearts of many investors. But these deep market downturns are unavoidable, and often relatively short, especially compared with the duration of bull markets.

Bear markets: When asset prices drop by 20% or more

A bear market is defined by a prolonged drop in asset prices — generally, when prices fall by 20% or more from their most recent high and are characterised by investors’ pessimism and low confidence.

There can be bear markets for a market as a whole, such as in the S&P 500 or JSE All Share index, as well as for individual stocks.

While investors might be bearish on an individual stock, that sentiment may not affect the market as a whole. But when the market turns bearish, almost all stocks within it begin to decline, even if individually they’re reporting good news and growing earnings.

Eventually, investors begin to find assets attractively priced and start buying, officially ending the bear market. While it might be too soon to label the latest development as a full-blown bear market, it’s always good to know that there are steps you can take to make sure your portfolio survives (and even thrives) until the bear transforms into a bull.

1. Have a financial plan and stick to it

To ensure that you live comfortably for the rest of your life, it’s generally advisable to devise a risk management, retirement and long-term investment strategy and keep tax expenses to a minimum.

Structure your investment portfolio to match those goals. Money that you’ll need in the short term or that you can’t afford to lose is best invested in relatively stable assets, such as money market or income funds. Goals that need funding in three to five years should be addressed with a mixture of different asset classes (multi-asset balanced funds). For money you won’t need for five or more years, consider assets with the potential to grow, such as stocks, which are more volatile.

Your financial plan should be sufficiently flexible to adapt to your circumstances as they change and to keep pace with the economic and market conditions in which your investment operates.

Sticking to a sound financial plan can also help keep you from trying to time the market based on emotions and can help you stay disciplined, which is a key factor in long-term investing.

2. Know that you have the resources to weather a crisis

Because market dips often coincide with periods of economic stress, it’s also essential to maintain, and possibly even add to, emergency reserves. In case of surprise expenses or a job loss, having a cash cushion on hand can keep you from having to resort to unattractive forms of financing like credit cards or withdrawing from long term investments.

If you’re retired, knowing that you have the next 24 to 36 months’ income in a money market or income fund, can help keep you calm and clear-headed.

Another advantage: Cash reserves can come in handy in down markets. With cash, you can buy in when prices are attractively low. So cash can provide your portfolio with some stability (low correlation, low volatility) and flexibility (to buy new investments without having to sell at a low).

3. Diversify

One great thing about long-term investing is that time tends to smooth out volatility. You can also manage volatility with diversification.

Having a percentage of your portfolio spread among stocks, bonds, cash, and alternative assets is the core of diversification. How you slice up your portfolio depends on your risk tolerance, time horizon, investment goals, etc.

A proper asset allocation strategy will allow you to avoid the potentially negative effects resulting from placing all your eggs in one basket.

4. Automate your investments and phase funds into the market

Automating your investments can do two things for you; first, it ensures that you’re taking advantage of the power of “rand-cost averaging” and compounding interest consistently over time. Second, it can help you avoid the pitfalls of trying to time the market.

Automating your contributions is a precommitment that can help counter behavioural bias, because, as the market sells off more, you start to wonder what the market is seeing that I don’t. Having a precommitment in this type of environment can be a powerful way to do the right thing, even when it feels really bad.

5. Don’t just “buy the dip” 

Be careful of the mantra that floats around that says “buy the dip”. If it’s a meaningful selloff, there can be more selloffs.

Stocks that have been favoured by the market might not be favourites anymore. You don’t necessarily want to assume that this is just a dip and it’s going to be exactly the way it used to be.

Study the details of a company. Learn about the leadership, business model, financials, and future business plans to discover insights into how a stock may perform over the coming years. Search for high-quality stocks with good fundamentals that the macro scenarios are unduly discounting.

6. Remember: Bear markets don’t last

The Schwab Center for Financial Research looked at both bull and bear markets for the S&P 500 Index going back to the late 1960s and found that the average bull market ran for about six years, delivering an average cumulative return of over 200%.

The average bear market lasted roughly 15 months, delivering an average cumulative loss of 38.4%. The longest of the bears was a little more than two years and was followed by a nearly five-year bull market. The shortest was the pandemic-fuelled bear market in early 2020, which lasted a mere 33 days.

Source: Schwab Center for Financial Research with data provided by Bloomberg. Data as of 31/12/2021.

A bear market can be a difficult time for investors. But even if the market is on a downward trend, savvy investors can still implement worthwhile investment strategies.

Winston Churchill is credited with saying: “Never let a good crisis go to waste”. What is inspiring about Churchill’s quote is that it causes you to look for a silver lining during a crisis and to seek opportunities where they might not have been before.

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Armand de Beer

PSG Wealth Pretoria-East


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