Imagine a bear attacking its prey, sliding its paws in a downward movement; This is how the global stock markets have behaved in recent months. Needless to say, its repercussions on COVID-19!
The global health crisis has raised fears of pushing several economies into a large-scale crisis. The COVID-19 pandemic caused global financial markets to rock, causing major declines in the world’s major indices. Although many coronavirus hotspots have started to show signs of flattening the curve, uncertainty around the stock markets remains current.
Striking like a flash of blue, the coronavirus pandemic has left investors struggling to set the market price with increasing uncertainty about the duration of its persistence. While this is not the first time that the world has entered a bear market, what is more troubling is that the stock markets have experienced one of their fastest bear market declines ever, which is not only stiff, but also psychologically handicapping.
Most global stock indexes recorded their biggest drop ever on 23rd March 2020, due to imminent economic threats from the coronavirus pandemic and the oil price war unleashed by Saudi Arabia.
Why is the bear market interesting?
What makes the bear market fascinating is the golden opportunity it offers to strengthen the equity portfolio and set the stage for long-term wealth creation. With many stocks trading at unbeatable prices, the bear market offers the opportunity to buy stocks of solid companies at reasonable prices.
While investors can take advantage of the bear phase and venture smart, what’s really going on is quite the opposite. Investors prefer to adopt one of the safest “selling” strategies to avoid potential losses or wait for a market dip. In an attempt to time the market, investors may tend to miss the boat, thereby losing the potential gains from the very likely stock market recovery.
But do not blame investors! It is a human psychology to feel safe when they see danger approaching. Let us understand that the psychology of the brain is more apparent. ?
When we experience fear, a response to fear begins in a section of our brain called tonsil, which becomes more active when we are exposed to a stressful situation like a stock market crash, and act as a panic trigger. Therefore, the unconscious part of the brain governs the conscious part, stimulating hasty decisions in circumstances like market upheavals.
In order to navigate through the stock market correction strongly, investors must fight their instincts, putting aside emotional motors like fear.
Dos and Don’ts in a Bear Market
To survive, in fact thrive in a bear market, investors can be careful with the following things to do and not protect their finances during this difficult phase:
If the investment plan has been prepared taking into account the inevitable market downturn, investors can stay the course with their defined investment allocation. The modification of the investment strategy in the middle of a bear market must be carefully considered. However, investors can reassess and modify their strategy as needed.
Investors generally tend to change their investment strategy in panic during a turbulent market, which abandons their years of investment principles and gets in the way of their long term financial goals.
Investors who try to speculate on the bottom of the bear market end up missing lucrative opportunities. It is imperative not to get caught up in an effort to time the market, as it is almost impossible to predict the next market movement.
Holding back investments and waiting for stocks to fall further can waste time and effort. And in the event that the prediction goes wrong, the investment goes completely bankrupt. Instead, investors can seek value in market turbulence and grab stocks of fundamentally healthy companies at reduced prices.
Although the price of a company’s stock generally looks attractive in a bear market, investors should make an informed decision before investing by doing proper basic research on the company and the industry it belongs to.
In addition, investors do not need to engage in panic selling in the face of enormous market volatility and can follow a disciplined investment approach, given the longer term situation. It should be remembered that the stock markets are volatile and will continue to fluctuate.
Whether it is a bear or bull market, investors’ decisions are usually influenced by the actions of acquaintances, relatives or other investors. But this strategy of herd mentality generally turns against the long term, leading to potential losses.
In order to avoid this obvious mistake, investors can place money in companies within their jurisdiction, which they can understand. A good knowledge of the products, the market, the weaknesses and the competitive strengths of the company increases the chances of good returns.
To take advantage of the best buying opportunities offered by the bear market, investors must invest for the long term. There is considerable historical evidence that shows a recovery in the longer term equity markets.
A classic example is the S & P / ASX 200 index, which plunged more than 50% between October 2007 and February 2009, to yield a significant return of around 57% by April 2013, then producing a return of more than 35% by February 2020.
Investors need to be alert to buying opportunities and look beyond short-term price fluctuations to move brilliantly into a bear market.
These can and cannot help investors avoid the mistakes they might regret in the midst of market turmoil. In addition, investors should be ultra-cautious on all fronts and avoid liquidating long-term investments in haste to judgment.
Let’s not forget, the famous quote from Warren Buffet: Remember, “Someone is sitting in the shade today because someone planted a tree a long time ago.”
While there is no guaranteed success formula for winning in a bear market phase, investors can keep a bird’s eye view, invest in companies with a healthy balance sheet and relatively immune operations against the coronavirus pandemic. In addition, companies that protect cash flow, manage costs without shutting down their workforce, and manage capital spending efficiently can be a good bet during market upheavals.
Stay abreast of market movements, economic transitions and consumer behavior;
Expand your horizon; and look at the pockets of suitable opportunities!