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Friday, November 13, 2015

How to survive and thrive during a bear phase in the stock market

During bull phases, the general direction of the stock market is upwards, but there are frequent corrections and consolidations along the way.

In bear phases, the general direction of the stock market is downwards, but there will be intermittent rallies in between. That is the way a stock market behaves.

Yet, small investors tend to become joyous and euphoric in bull phases – forgetting that a bear phase is around the corner.

They also become despondent and depressed during bear phases – even though duration of a bear phase is often less than that of a bull phase.

The current bear phase is into its 9th month. And, there seems to be no end in sight. BJP’s popularity seems to be waning. Economic growth is sluggish. Corporate earnings are stagnant.

What should small investors do in such a situation?

Stay out of the way of a bear: they are powerful and fearless animals, and will maul you if you try to fight back. The sensible strategy would be to climb a tree to safety. In investment terms, put your money in fixed income instruments or liquid funds, or ‘defensive’ sectors (like FMCG, Pharma) – so that you can earn some returns.

Continue with your fund SIPs: the best way to build wealth from the market is to stay invested for the long term. Bear phases allow you to buy more units of the fund. Allow the fund manager to churn the fund portfolio – it is in his vested interest to do so for best results.

Control your emotions: decision making – specially under uncertain conditions – has to be fact-based and dispassionate. This applies particularly for investments, where your hard-earned money is at stake. If a stock you hold is losing ground fast, don’t try to ‘average down’ because you don’t know how low it can go. Wait for the stock price to turn around. Then ‘average up’.

Follow an asset allocation plan: distribute your investments among equities, debt instruments, gold and cash. The plan will take the guess work out of your investment decisions. Only equities get affected by bear phases. When your equity allocation falls below the threshold you have set in the plan, use the cash to rebalance your assets.

Related Posts

Five things you should avoid in a bear market
Five more things to avoid in a Bear Market

Five strategies to follow in a bear market

How to reallocate your assets

About asset allocation

4 comments:

K said...

Subhankar,
Continue with your fund SIPs -- This seem to be starkly in contrast to your view on SIP with the following post to avoid SIP.

Has your views on SIP has changed?

http://investmentsfordummieslikeme.blogspot.in/2008/08/if-you-must-sip-sip-good-darjeeling-tea.html

Thanks,
Karthik

Subhankar said...

Good question, Karthik. Glad you asked it.

My views on SIP have not changed. I still think that 'timing the market' or 'value averaging' are better strategies for long-term wealth building than cost averaging (which is what a SIP is).

SIP (a glorified term for a recurring deposit) is a mechanical (lazy?) way of investing one's savings that many fund investors prefer because they do not have the patience or skills or conviction to time the market (or do value averaging). However, they tend to become fearful and discontinue their SIPs during bear phases - which defeats the whole purpose of a SIP.

K said...

The fund managers are in the same shoes as that of the investors -- lacking discipline and tip toeing with the mainstream notion. The one big thing in favor of the investor at this time is the inflation monster is contained.

Practicing the art of discipline is the foundation and apex of investing. It is simple but not easy. Gosh, Buffett could not have been lucid than that.

Have you tried Dow Theory on Indian markets?

Subhankar said...

We don't have a Transportation (Rail) index in India. However the broad concepts of Dow Theory can be used as a guideline for any stock index.