As the possibility of a bear market haunts investors in other regions, how can ASX investors survive and thrive amidst its deadly paws?
Wall Street was down by almost 19% and was on the edge of a bear market last May 20, 2022. On the other hand, Australia is still performing better than other markets. Even so, ASX investors must come prepared for a possible drop of 20% or more as the stock market remains to be volatile. Remember, the quick and wise always win.
In 2021, 38% of investors sold their stocks due to global panic and most of them regretted their decision. And with this year’s combination of high interest, inflation rates, the stalled economic activity in China, and the war in Ukraine, the global market will inevitably slow down which could lead investors to make decisions based on emotions once again.
From a vantage point, investors can still benefit from a bear market with the right strategies. Here are the tactics in case the worst market condition happens.
Time in the Market vs Timing the Market
A research published in June 2021 showed the perils of timing the market. According to the report, when you invested £1,000 in the FTSE 250 in 1986, your investment might be worth £43,000 in 2021, only if you left it untouched. On the other hand, if you are timing the market, you will only have a fund value of £10,627.
Such a waste, isn’t it?
This demonstrates the advantage of using the ‘time in the market’ principle. Also known as the golden rule of investing, this means sticking with your chosen stocks unless the original reasons for buying them have changed.
Unfortunately, several investors use the ‘timing the market’ strategy, which means trying to buy stocks when they’re low and sell when they’re high. The strategy works sometimes, but even the best professionals often fail to accurately predict the market behaviour.
You should know that sitting still instead of constantly adjusting your portfolio to ‘match’ the current market is key to revealing the true value of your investments.
Choose Defensive Stocks and High-Quality Companies Paying Dividends
During a market downturn, choose consumer staples and healthcare companies. Look for defensive stocks or businesses that show high balance sheets. Gold, silver and other precious metals have shown strong resiliency during bear market conditions.
Established companies paying dividends are a good opportunity, too. Choose ventures that have consistently grown their dividends over the years as this can potentially improve your overall returns when the stock prices fall.
Pro Tip: Stay away from tech stocks in the meantime. This year, the sector was seen as vulnerable to the increasing interest rates and has fallen more than 20%.
Invest a Fixed Amount at Regular Intervals
By investing a fixed amount consistently regardless of the market behaviour, you take advantage of getting equities for more affordable costs. Once the market rebounds, your shares will rise in value. This tactic is also called dollar-cost averaging, a bear market-proof strategy and ideal for investors with lower risk tolerance.
If Warren Buffett recommends dollar-cost averaging amidst his demonstrated ability to pick stocks that outperform the market, then we should all take heed.
Final Words
When stocks start to fall, it’s hard to tell when they will reach the bottom, so let’s look at the historical data of bear markets instead.
Since 1926, the S&P experienced 14 bear markets and these lasted less than a year. A bull market, on the other hand, can last for multiple years which gives you more window to gain profit – as long as you are patient enough. With this, we find it fitting to share the words of the great Benjamin Graham.
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go.”
