Bear markets are typically defined as a 20% drop in the broad stock market. The S&P 500 Index, a barometer for the stock market, has fallen by that measure at the previous year’s close, pushing the market into bear market territory.
Source: Tiger Brokers trading app
S&P 500 Index Feb 2022 to Jan 2023
While there has been a slight rebound in recent weeks, it can still be a scary time to invest. Especially given that the previous two stock market crashes were over 30% (in 2020) and over 55% (in 2008).
What Should Investors Do In A Bear Market?
There are many new investors in the financial markets today. While I cannot find statistics for Singapore, we can extrapolate the figures based on US stock brokerages.
An established stock brokerage, Charles Schwab has grown its Active Brokerage Accounts from 12.3 million in 2019 to 33.2 million in 2021. Robinhood, a digital stock brokerage grew its investor base by 3.5x – from 5.1 million funded accounts in 2019 to 22.7 million funded accounts in 2021. Many brokerages, including Tiger Brokers and others in Singapore, likely witnessed similar growth in their retail investor base in this timeframe.
Many of these new investors may not have navigated a bear market before.
Even for more experienced investors, navigating a stock market crash is never fun. Worse still, such investors would also have significantly more funds in their portfolios – making it more difficult to stomach big downward swings.
So, what should we do in a bear market?
#1 Do Nothing – Stick To Our Investing Strategy
If we’re already investing in a broadly diversified portfolio, perhaps the best thing we can do is nothing.
There must be a reason why we have invested in such a diversified portfolio. We should revisit our investment thesis – and if it still makes logical sense for the long-term, then there’s little reason to sell now. In fact, the worst time to sell a long-term portfolio is right after a deep market correction. Instead, we should continue investing the way we have. One common method we can take advantage of is to Dollar-Cost Average (DCA) in the markets.
Of course, we could review our portfolio and realise that we made a bad investment decision. In such instances, it would make sense to sell the losers. It’s also important to note that even if our portfolio is suitable based on our profile, we may not have the appetite to carry such risks.
#2 Rebalance Our Portfolio
When the stock market experiences a significant swing, whether upward or downward, we should review our portfolio. Within our stock portfolio, we may find that our exposure to certain sectors has ballooned beyond what we intended. Similarly, we may find that our exposure to other sectors has diminished beyond what we intended.
When this happens, it might be a good idea to rebalance our portfolio so that it has the same amount of stocks and/or sectors as we planned. Of course, this still has to go hand-in-hand with the first point, which is to understand whether our initial allocation still has merit.
For example, in the early days of COVID-19, the hospitality sector crashed far more than any other sector. On the surface, it could seem like we should rebalance our portfolio by buying more travel-related stocks. But if we review our investment thesis, we will likely want to reduce our exposure to the sector.
Similarly, even if we do not have the expertise to pick individual stocks or sectors and simply invest a portion in equities and bonds, we may find that our allocation to stocks has dropped because stock prices fell far more than bonds. In such a scenario, we may choose to rebalance our portfolio to revert it to our original allocation. We may also realise that we do not have the stomach for wild fluctuations in our portfolio and choose a new portfolio allocation for our stocks and bonds.
#3 Add Some Assets That Provide Income
When stock markets drop, it can be even more problematic if we are relying on income from our portfolio to supplement our lifestyle.
One way to mitigate this (and not have to liquidate too much of our portfolio when stocks crash) is to derive some income from our portfolio. Even if we do not rely on income from our portfolio to fund our lifestyle, such income can act as our investment war chest to put into investing even more in our desired asset class/sector. We can consider blue-chip REITs and stocks as well as bonds.
#4 Invest Even More!
We’ve covered why there’s no reason to stop investing during a market crash. Another approach we can take is to invest even more when the stock markets are down.
Personally, this is an investment approach I adopt to a certain degree. I tend to invest a separate lump sum (beyond my regular investing plan) when the stock markets dip 10%, and every subsequent 10%.
This is simply how I do it, and 10% does not have to be the benchmark. The logic here is that when the market dips, we are able to buy the same portfolio that we’ve already wanted at a much lower valuation. As a caution, stock markets can continue dropping much more than the initial 10% (with various examples cited above).
#5 Continue Building On Our Investing Knowledge
Just like money compounds over time, our knowledge also compounds as we build on the existing information we have.
There’s simply no end to how much more we can learn about investing. We can always read more books and visit websites like DollarsAndSense, listen to podcasts and watch videos, talk to industry professionals and financial advisors, enrol in investment courses, and do a variety of other things.
We can also head down to events. One event that is kicking off in 2023 is the Tiger Brokers’ flagship What Would Tiger Do (WWTD) 2023 immersive experience on 14 and 15 January from 10am to 8pm (last entry at 7.30pm) at the Visual Arts Centre (the Glass-house Exhibition Gallery above Dhoby Ghaut MRT station).
At the event, we can listen to industry professionals sharing their insights on the state of major economies including USA, China and Europe, Japan and, to give it a local flavour, Singapore.
We also earn an “instant return” in the form of free ice cream and KOI bubble tea, as well as stand to win attractive prizes at its lucky draw!
I will be headed down, so do say hi if our paths cross. See you there!
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