How to tackle a bear market?

Sensex’s rollercoaster ride over the last several months has shaken the faith of a lot of equity investors. People who prided themselves as long term investors suddenly question their ability to stay patient as the market moves up and down. Savvy investors who have seen several market cycles and understand the nature of equity as an asset class are not really perturbed. They see these swings as opportunities to make long term investments.

However as soon as investments are done, most people expect markets to rise upwards. If the markets are moving upwards, everyone feels confident and is tempted to invest more. On the other hand if there is downside or negative returns for more than several months, one tends to get pessimistic about future returns. In such a situation people are tempted to stop their investments temporarily with the belief that as soon as the market starts moving up, one will start all over again. Markets like life do not always move in a linear fashion and hence it’s almost impossible to get timing right all the time. Second the Sensex will not call anyone to tell whether the downside has come to an end or whether the up move has started.

Contrary to what most people would expect, I feel that if the markets go down after you have invested at reasonable levels, you have every reason to be happy. This is because you get to buy at lower levels and the more it goes down, the better your purchase price would be. However it is extremely difficult to turn a blind eye to the red numbers that you see across your investments and this is precisely what shakes up confidence. The only time you should be concerned about the value of your equity investments is when you really need the money and wish to sell your investments. I am not saying that one should not review investments or just turn a blind eye to investments once made. The key point is that one should review the fundamentals of the investments made regularly, but if sound investments goes down for a few quarters , do not be unduly worried about it. Review whether the same reasons for which you had made this investment still applies. No equity investment is insulated from a downturn and there are times in a stock or fund’s life when it will under perform. There can be no equity investment that cannot go down. In bear markets, investments can be down not just for several quarters but also for several years.

Subsequently when investments do rise, people who have bought continuously at lower levels earn much higher returns than the ones who had bought only when the markets were going up. Besides global woes, there are several risks that our markets are exposed to. Some of them are:

• Oil & Commodity Prices going up
• Inflation
• Earnings slowdown
• Political risks
• Risk Aversion and
• FII selling and not enough domestic buying

Some analysts will say there is more bad news to come while some will say markets have discounted the bad news. We can only say that the market has discounted the bad news only when it is possible for the market to foresee all types of bad news. As far as market pundits and ability is concerned, no one really talked about subprime until last year or about oil prices and inflation being major problems until a couple of months back.
 
This brings me to a fundamental question “Can market movements and different types of risks be predicted at all?” We can only dissect and understand when the initial strong symptoms start to appear or mostly after the event has happened. Like the fury of nature, there will be testing times in the life of every equity investor. One needs to understand the very nature of equities, risk associated with it and also that seeing negative returns is not necessarily bad. Yes it is an unpleasant situation to see negative numbers if you need money for a financial goal (having been invested for several years). To mitigate this risk one should start liquidating equity assets atleast 12-18 months before you need money. If the market is down at that point of time, you should patiently wait for some meaningful recovery to happen. In sound equity investments, markets generally give an exit opportunity to most investors. It is only the greed quotient that determines the final outcome. For all others, seeing negative returns or red after investments are made isn’t really harmful.

Going Green is good but when it’s a question of your investments, Red is good for a long term investor and makes absolute economic sense for a long term equity investor.

- Amar Pandit

The author is a practising Certified Financial Planner. He can be reached at amar.pandit@moneycontrol.com

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