What is a “Bear Market”?
When the prices of the assets are set to fall for a longer period of time throughout the market by at least 20% from their all-time highs, then the scenario is known as a ‘bear market’. The entire global economy is bonded with the bear market. It is often considered that where there is a bear market, there are certain chances of upcoming or ongoing economic recession. Not only recession but there might also be a plethora of reasons behind a bear market.
A recession is a period when the gross domestic product or GDP keeps falling for two consecutive quarters. The first quarter of 2022 saw a fall in GDP by 1.4%. Nonetheless, a scenario of recession is not always a reason for a bear market. A report by Invesco says that out of 17 bear markets from the Great Depression through 2020, only nine were related to the recession.
Bear markets are hard to predict and occur during a struggling economy. Fortunately, there are some indices to know the onset of a bear market. Some of them include interest rates, increasing unemployment rates with a decrease in employment, and high mortgage rates. Also, in such situations inflation rates also get high. The above indicators are sufficient to learn about the bear market in the system.
However, bear markets have a shorter life span than bull markets. CNBC reports say that a bear market lasts about 289 days whereas a bull market can go above 991 days. The average losses that occurred during these low market days have been calculated at 33%. Meanwhile, an effective average gain of 159% has been recorded during an overall cycle of a bull market.
Also read: How to turn your old phone into a hardware crypto wallet?
Ways to survive ‘Bear Market’
Let us move to the most exciting part- how to survive a bear market. There are several ways that big-time institutional and retail investors invest in stocks and the crypto market. Let us hit the next section of this article.
Investors can move to strategic investments known as Dollar-Cost Averaging (DCA). The DCA is an investment method where a fixed dollar amount is invested in a certain asset regardless of its price. The fixed investment in the long term for a fixed asset price can result in an uptrend in a bull market. This investment on a regular basis can lead to returns in higher amounts.
Steady and equal investments in any stock or share for an indefinite time interval can lead to unexpectedly higher returns. In this way, the average share price becomes lower and lower with time when the total number of shares increases. Thus the risk associated with a significant amount of money for any individual is eliminated with this strategy. With no second thought, it is a wise master plan to safeguard the capital during a sharp bear market.
Diversify Portfolios Without Disengaging
Diversification is an investing strategy that contains mixes of stocks, bonds, cash, and other alternative digital assets. In this way, the risk is divided among many assets and limits the exposure of high risk to a certain single asset. Diversifying the portfolio in different kinds of assets is to yield long-term returns with a low risk of securities.
There is a well-said proverb- do not put all your eggs in one basket. This simply means that it is not suggested to invest all the resources in a single asset as this might attract negative effects. Investors who diversify their resources in a range of assets are likely to be affected less by the outcomes of a bear market. As the prices of assets go down drastically, this helpful strategy ensures that the portfolio contains a mix of winners and losers during a bear run.
Some of the asset classes in diversification include:
- Stocks- shares and equities of a publicly traded company.
- Bonds– government and fixed-income debt bonds.
- Real Estate- Land, Agricultural land, buildings, livestock, etc.
- Exchange-traded Fund (ETF)- Pool of index, commodity, or sector securities
- Commodities– goods or raw materials that are necessary for the production of other services and end products.
- Cash and Short-Term Cash Equivalents (CCE)- Short-term, low-risk investments, bank deposit bills, treasury bills, etc.
Go for Defensive assets
Defensive assets are generally long-term stable and have lower volatility. Even if the state of the overall market is poor, such types of assets provide steady growth, and consistent dividends, and generally perform well in a long run. A few examples related to defensive assets are interests in bank deposits, bonds, and cash investments. Many experts suggest that defensive industries producing household non-durables such as shampoo, creams, body lotions, and toothpaste always perform well in the long-term bear run. This is because people will still use these products during their hard times.
Such types of industries are well-established firms with huge balance sheets that can withstand harsh market climates for a longer duration. Therefore, it is always suggested to go for companies’ stocks that are in the market for a very long time. These organizations are very stable and reliable in a bear market.
Play dead in a Bear Market
According to Hartford Funds, An eminent fund monitoring organization says that till now 26 bear markets have occurred since 1928. Ever since World War II, the periodicity of the bear market has decreased. Between 1928 and 1945, 12 bear markets occurred. Whereas, after 1945 only 14 bear markets took place.
A similar protocol is played during a bear market when you come across a bear in the woods- you play dead. It is the best thing to do during a bear market. Fighting back a bear can be precarious. Therefore, you should stay calm without making sudden moves to outperform a bear. Hence, playing dead during a bear market means diversifying a bigger portion of your portfolios into multiple assets and short maturities.
It is highly recommended to take your mind off the ongoing downturn. In a long run, the bull market will definitely outperform the bear market and your investments can yield higher returns.
NOTE: This article is for information purposes only and does not suggest, recommend, or sponsor any single idea of investment, or product. It is suggested to research thoroughly before you invest in the highly volatile crypto and the stock market.
Also read: How to buy land in metaverse: A step-by-step guide
[…] What is a “Bear Market” and what are the ways to survive it? […]