Strategies for Enduring a Downturn in the Stock Market
In the world of investments, understanding the ebb and flow of market cycles is crucial. Here's a look at the importance of managing portfolio allocation during bear markets, based on recent data.
Bear markets, defined as a decline of 20% or more, are relatively infrequent but can have a significant impact. On average, they occur every five years, with more modest 15% declines happening about once every two years. For instance, the Indian stock market, represented by the NIFTY 50, has seen eight such 20% drops in the last 25 years, or approximately once every three years.
These downturns, however, are typically short-lived. The average duration of a bear market is around 286 days, or less than 10 months. After every bear market, the NIFTY 50 has continued its upward march, offering a Compound Annual Growth Rate (CAGR) of 13 to 14% in the long term.
Investors should not be disheartened during bear markets. History shows that they are followed by a bull market and a new all-time high. This trend has been observed in the Indian market, with the NIFTY 50 and SENSEX 30 continually making new highs after every bear market.
For instance, in 2022, despite the NIFTY 50 giving flat returns (nearly 3%), it delivered 12%, 15%, and 24% in 2019, 2020, and 2021, respectively. By contrast, during bull markets, the US stock market, represented by the S&P 500 index, has seen an average gain of 114%.
During bear markets, it's essential to adopt a disciplined approach to investing. This includes diversifying your portfolio, selling losers and investing in winners, maintaining appropriate asset allocation, and controlling your emotions. It's also crucial to hold your nerve, temper return expectations, and regularly rebalance your portfolio to keep it moving in line with your goals.
It's important to remember that in a bear market, one cannot expect double-digit returns from equities. Instead, one should expect low or negative returns and smartly balance the portfolio with other asset classes like gold, debt, and cash. A good financial plan should include keeping some funds for emergencies, providing a cushion of cash for buying opportunities, and in-built flexibility to move from growth stocks to value and defensive stocks.
Lastly, it's essential not to dwell on past actions or inactions during a bear market. The 2008 global financial crisis, for example, caused significant damage to the Indian and world economies, taking more time for the markets to recover. However, it's crucial to learn from these experiences and focus on the strategies that will help you build wealth over the long term.
By getting these simple steps and strategies right, you will likely end up with more wealth than most others who make unplanned, haphazard decisions with their money.
Incorporating a fixed deposit as part of a well-rounded personal-finance plan can provide stability during bear markets in the stock-market, ensuring a steady return when equities may be offering low or negative returns. On the other hand, investing in the stock-market during bear markets, while maintaining a disciplined approach, can yield significant returns upon the subsequent bull market, boosting the overall financial growth as observed in the Indian market.
