Bearish Market: How to Face It?
Updated: Apr 7
When it comes to investing, being able to identify and analyze the market’s trend is crucial. It helps us to choose the right decisions. When a market is trending, it is primarily moving in one direction, either up or down. The Professionals in finance regularly use labels like "bull" or "bear" markets to describe uptrends and downtrends. These terms can also be used to represent the investors’ feelings about the market and the ensuing trends.
In simple terms, a bull market refers to when the market is on the rise. In the opposite, a bear market is considered to exist when a market is on decline. Typically, a bull market occurs when prices rise 20% or more from a bottom and a bear market is considered to be a price decline of 20% or more from the recent high.
Nowadays, we are now facing a bearish market because of the Global Pandemic caused by the COVID-19. In the chart below, Jakarta Composite Stock Price Index dropped 27,95% YTD by March 2020 (IDX Quarterly Statistics 2020). This event can be considered as a bearish market.
Source : IDX
A bear market often occurs just before or after the economy moves into a recession. People often illustrate a bearish market as a bad market situation and many people didn’t like it when we were faced with the bearish market, like in 2008. In the midst of this fluctuative situation, what should you do? Here’s some tips for investors to face the bearish market :
Think Beyond the Current Market
When we think about bearish markets, It's hard to predict how long a bear market will last, and in some cases, they can be quite drawn out. As such, don't invest in a bear market with the hopes of buying low and getting rich within the year. That's unlikely to happen.
Instead, take a long-term approach to investing, and assume that any stocks you buy now are stocks you'll continue holding for a number of years. Incidentally, that's a smart approach for stock investing in general.
2. Don’t Attempt Time to the Market
Timing the market is generally an ineffective investing strategy, because market timing is something that is difficult, or nearly impossible. In this case, you can use a strategy called Dollar Cost Averaging.
Dollar Cost Averaging (DCA) is an investment strategy routinely in each period (for example every month) in the same amount regardless of or paying attention to the NAV / unit price (net asset value per unit) of the Investment Fund. Using DCA, can help you have discipline because it ensures that you are not too exposed when buying at high prices; while on the other hand it helps you when the market recovers, because you have bought when the market is experiencing a correction.
3. Invest in Sector that Perform Well in the Recession
If you want to add some stabilizing assets to your portfolio, look to the sectors that tend to perform well during market downturns. As you know, especially in this pandemic situation, a company like e-commerce, a company engaged in the pharmaceutical field, etc. By investing in this kind of company, will give you exposure to companies in that industry, which tend to be more stable during recessions.
4. Don’t Get Emotional
Entering the market can be a little scary in itself, even more so when you're dipping your toes in for the first time during a bear market. McCoys said there are two principles that you have to keep in your mind. First, don't allow yourself to get into a position in which you're forced to sell at the bottom. Second, have a plan that includes rebalancing your portfolio to keep your allocation in line with the risk tolerance and investment goals. When things are going great and everyone is euphoric, take profits," McCoy says. "Keep those profits on the 'stay-rich' side of your ledger. Then when times are bad, you'll have ample cash to buy, rebalancing your portfolio back to your investment plan so that you can take advantage of a stock market that is now on sale."
Pizzuro once said "Investing, in general, requires an assessment of one's risk tolerance, and never is that risk tolerance tested more than in the midst of a bear market,". That’s all based on how much risk you're comfortable with versus how much risk you need to take to achieve your goals can be fruitful once the market begins to turn bullish again
Investing in a bear market can be a scary prospect, especially if you're new to it. And to be clear, we haven't had a bear market in over 10 years, so it's a novel concept for many. But rather than expend energy fearing the bear market we've landed in, aim to use it to your advantage. You may not reap the rewards initially, but over time, the upside could be huge.
Although bearish markets might be horrifying for investors, we still have some positive side because bearish markets make us gain some experience about how to face a bearish market and more. for a beginner, you can make it as a turning point, and start to invest, as you know, all the price is lower than usual right now. So start making your own portfolio and begin to invest.
Written & Illustrated by : Aron Nathan, Safina Dhita