Investing during a bear market

Investing during a bear market

If you’ve only got a minute:

  • A market is said to be in bear territory when securities or stock market indexes fall by at least 20% from their recent highs.
  • History has shown that bear markets often don’t last as long as bull markets do.
  • A bear market might not seem like the best time to invest but there are usually opportunities for investors provided they stick to best practices like investing in quality companies and staying long-term.

In the 11 years since the end of the Global Financial Crisis (GFC) in 2009, financial markets experienced an uninterrupted period of prolonged price increases. This situation, known as a bull run, was the longest one in history.

However, it all came to an end in March 2020 when many governments imposed lockdowns due to the Covid-19 outbreak. They affected adversely the financial circumstances of many individuals and some businesses were closed for good.

In 1Q2020, the S&P 500 index, which is often used as a barometer for the performance of US stock market, was down about 21% while Singapore’s Straits Times Index (STI) shed 25% of its value. It was the worst quarter for equities since 2008.

While financial markets posted a strong recovery in the 18 months that followed – even hitting all-time highs – they have struggled in 2022. Much of this is due to an increasingly negative economic outlook and rising interest rates to combat inflation.

The STI has managed to weather this storm relatively well, but at the time of writing, the S&P 500 has been in a bear market since mid-June. Many investors have seen their portfolios lose value while companies have seen their stock prices plummet.

For investors, it’s understandable to feel concerned or in some cases panic, with the sea of red seen in the stock markets and portfolios. Meanwhile, those who were thinking of investing but have always harboured a fear of financial markets, have been dissuaded from starting.

That said, bear markets often present opportunities for both first-time investors and those who have already gotten their feet wet. Given that it is always darkest before dawn, it might not be a bad time for those who think long-term to consider making investments in quality companies or financial products.

What is a bear market?

While exact definitions may vary, it is generally agreed that a market is said to be in bear territory when securities or stock market indexes fall by at least 20% from their recent highs. This is accompanied by negative investor sentiment and pessimism over economic growth.

Investing in Bear Market

Likewise, a bull market is said to be in play when securities or stock market indexes recover 20% over a sustained period from its recent low. Investor sentiment is usually buoyant and economic growth is on the up.

Bear markets don’t last as long as bull markets

While there have been similar occurrences of bull and bear markets in history, bear markets often don’t last as long as bull markets do. Taking the S&P 500 as an example, a typical bear market lasts just over 9.5 months while bull markets last for an average of 2.7 years.

In other words, financial markets spend more time experiencing a sustained period on the up rather than down. This doesn’t sound all too bad for long-term investors, right? As such, it is worth re-assessing the risk-reward of putting fresh funds to work.

Bear market opportunities

If you have never put money into the market before, this may not seem like the best time to start. The same goes for those who are still feeling burnt from the recent market selloffs. That said, it does pay to stay calm as a bear market might serve as a great buying opportunity.

History has shown that the market’s rapid pace of decline could actually be a positive sign, with stocks set to rebound if the broader economy avoids a downturn.

In 2022, the S&P 500 corrected 13.3% from January to May. Based on data dating back to 1927, there were only five other occasions where the S&P 500 registered higher magnitude of losses during the first five months of a year. The S&P 500 fell 23.8% on average during those occasions.

Investing in Bear Market

Using the US equity market as a proxy, DBS Chief Investment Office found that risk assets tended see sharp recoveries following corrections. In the subsequent 12 months after an acute correction, the S&P 500 has rallied 20.0% on average after (with positive returns on four out of the five occasions).

What to take note of before investing

Before you jump right in, ensure that the money you are putting into investment is idle cash. Especially since there are recessionary concerns, it is prudent to have at least 3 to 6 months of emergency cash, or more if you have dependants, to tide you over during a crisis, and at least 12 months for those who are self-employed.

Once you have set these savings aside, you should consider making them work harder for you via investing wisely. If you are just starting out and do not have sufficient funds for lump-sum investing - it typically requires somewhere between $1,000 and $5,000 per security - there are more affordable options available.

For example, you can consider investing through a regular savings plan like DBS Invest-Saver, which lets you invest a fixed sum from S$100 a month.

The next step is to evaluate your risk profile as the type of investment asset chosen by you should reflect your risk appetite. These include bonds, stocks, exchange-traded funds, unit trusts, and leveraged products such as futures.

If you are unsure of your risk profile but want to invest in ready-made solutions, robo-advisors like DBS digiPortfolio are an option to consider. A robo-advisor is a digital investment platform that provides automated, algorithm-driven financial planning services. Robo-advisors usually collect some information about you in order to find out more about your financial situation and risk appetite. It will use this data to provide and recommend a portfolio most suited to your profile.

Whatever option you choose, remember to only invest the amount that you can afford to do without in the short term as investing comes with risks and needs time to grow. Do your due diligence and understand the investment products before going ahead and adopt a diversified approach.

Investing in Bear Market

What should investors look out for?

On the surface, a bear market might not seem like the best time to invest but there are usually opportunities for investors provided they stick to best practices.

Focus on quality

Accumulating stocks of stable and reputable companies with strong fundamentals during a bear market could be a good strategy for long-term investments as many of them might be trading below their fair value. In other words, you should focus on quality companies.

Granted, during market downturns, almost all companies face selloffs. However, those that have taken on too much debt or don't have competitive advantages (i.e. not producing unique products) tend to get hit the hardest, while high-quality companies tend to fare better.

But for a new investor, finding the right stock to buy can be daunting. For a start, you can look at defensive stocks. They are typically large-cap companies who have strong balance sheets that hold up well during recessions. Common examples include companies in the consumer staples industry, utilities or healthcare.

Stay long-term

When investing during a bear market, its best to take a long-term view to constructing your investment portfolio. This is because, during this period, you may be required to have longer holding power since no one knows how much lower the market will go, or when it will start to recover.

Depending on your time horizon, it can affect the potential returns of your investments, as well as the type of investments you are considering.

The idea behind thinking long when it comes to investment horizon is that most stocks provide long-term return to shareholders because the economy grows over the long-run and companies in the stock market, taken together, profit. Those growing profits accrue over to shareholders.

Investing in Bear Market

As we have previously shared, effective lump-sum investing often requires somewhere between $1,000 and $5,000 per security. This is quite a tidy sum for someone who has just started working or has many financial commitments.

Other options are available like investing through a RSP like DBS Invest-Saver. This style of investing is also called dollar-cost averaging - a strategy where you invest a fixed-sum regularly into the same choice of investment over a period. The investment takes place regardless of market conditions, so you accumulate more units when prices are low and less units when prices are high.

Meanwhile, with robo-advisors like DBS digiPortfolio, you can invest in ready-made investment portfolios tailored to your risk profile for as little as $1,000.

Another option that has relatively low entry costs is to build your own investment portfolio with exchange-traded funds (ETFs) or unit trusts. This can be done either through investing in stock market index funds or funds that focus on particular sectors (e.g. technology, energy).

Be steady

When considering investing during a bear market, don’t yield to the temptation of trying to time the market to buy at the bottom. Finding the exact moment when the market hits a bottom is difficult and even the pros get it wrong from time to time.

Focus on buying stocks or funds because you want to own the business and/or believe a particular market or sector has long-term prospects, even if prices goes down a little more after you buy.

Instead of trying to find the bottom and investing all your funds at once, it also helps to view investing during a bear market as an opportunity to build positions over time. What you can consider doing is to build your existing stock and/or fund investments gradually over time. One of the benefits of doing this is that if you're wrong and the securities you have bought fall, you'll be able to take advantage of the new lower prices to further build on your long-term positions.

Overall, what ties this strategy together is knowing your risk tolerance and using investment metrics to help you make decisions. You can also use technical indicators to ensure that you make purchases within a reasonable price range to maximise your long-run profits.

In summary

Whether you are a new investor or looking out for investment opportunities in the current bear market, be sure to invest after setting aside emergency cash, and start taking the next steps to growing your wealth.

As markets tend to be choppy during bear markets, it is important to think long-term and focus on quality investments.

For those who are already in the market, investing during a bear market can be a way to supplement your other investments as part of a long-term strategy.

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DBS Chief Investment Office, “Risk assets look rewarding on a 12-month time frame,” (2022, Jun 3) Retrieved 21 Jun 2022.

Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.

All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.

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