Tips to “tame” the bear (market) in 2023
With rising inflation leading to interest rate hikes and a general decline in growth caused by ongoing volatility, the economic outlook for 2023 is ominous, to say the least. In fact, according to The Economist¹, a global recession will likely be imminent, due to the “perma-crisis” of instability and insecurity that is being carried over from this year, as geopolitical upheavals, soaring energy costs, supply chain disruptions, and other pandemic-related repercussions continue to persist.
Although the general outlook for the coming months seems to be all doom and gloom, there is also the other side of the coin, where discerning investors can capitalise on the downward trend in the markets – otherwise known as the bear market.
Brought about by a drop in investor sentiment and confidence, a bear market happens as the result of plummeting index prices (i.e. a 20% fall from recent highs) over a prolonged period. During this time, spurred on by the growing sense of pessimism, investors typically try to sell off their liquid assets to minimise losses, driving prices down even further despite occasional uplifts and positive news regarding a stock or the market as a whole.
Why invest during a bear market?
Under such bleak circumstances, investing may be the last thing on people’s minds.
However, there are upsides to a bear market and its window of opportunity. Seasoned investors, in particular, may navigate or respond to the downturn by adopting prudent and more defensive strategies to better position their portfolio or speculate on the slump by shorting for potentially higher returns.
Spotting the coming bear market
Before diving into the tips that can help you make the most of a bear market, it is worth noting that on average, a bear market can last 289 days² in the US, home to the world’s largest stock exchange.
Although it often happens before or after an economy moves into recession, many investors keep an eye out for connecting factors that indicate an imminent slowdown to stay ahead of the game. These include an uptick in downsizing measures and layoffs by companies, as indicated by key resources like the Bureau of Labour Statistics and Nonfarm Payroll Report (NFP) if you are in the US. A strengthening US dollar can also be telling in itself, as investors become more inclined to purchase dollars amid an uncertain climate to leverage the latter’s status as the world’s reserve currency.
How does one “tame” the bear?
Here are several ways with which investors can optimise their earnings while protecting their holdings in a bear market:
• Mix things up: Although diversifying has always been recommended, those who go for a variety of assets that deliver steadier returns will go far when conditions are rocky. As part of a prudent and more defensive strategy, these assets could include stocks of companies that are deemed “recession-proof”, such as those in the healthcare and pharmaceutical sectors because medication is deemed a necessity. Bonds also make for a relatively safer bet, as they offer steady coupon pay-outs and their yields typically rise when interest rates rise.
• Hold on: Patience is a virtue when it comes to bear markets (and investments in general). Instead of panic-selling stocks when prices go down, it could be more rewarding to hang on to them and endure the bumpy ride until the storm passes. That way, you could gradually reap more returns over the long term, as compared to risking it all for short-term gains. These returns could take the form of dividends if the stocks are from dividend-paying companies, or capital appreciation if there is an increase in the value of the companies themselves.
• Try dollar-cost averaging: Rather than double down by buying more of a particular stock when its price is low and have greater downside exposure when the price tumbles further, it would be less risky to regularly increase your holdings of an asset by continually investing money in roughly-equal amounts to average out the purchase price over time. This is otherwise known as dollar-cost averaging.
• Short the market: As buying more stocks during a downturn could seem risky, shorting the market can be an effective way to generate potential returns. This involves borrowing stocks you do not own to sell when the price is high, then buying them back at lower prices to make a gain on the difference. To do this, you can look to Contracts for Differences (CFDs), a financial product that gives investors leverage to trade with, without the need to take ownership of the underlying assets, such as shares, forex, indices, or commodities.
Get ahead during bear markets
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Source:
¹ https://www.economist.com/the-world-ahead/2022/11/18/why-a-global-recession-is-inevitable-in-2023
