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Investment strategies for a bearish market

Lessons to be learned from a global pandemic

The impact of COVID-19 on US markets has been remarkable. Whilst the US S&P 500 Index and Nasdaq took a severe plunge between February and March 2020 at the time of writing this article (end of July 2020) US markets have been on a steady path to recovery to pre-COVID pandemic levels with the NASDAQ steadily growing and surpassing pre-pandemic levels.

As Paul Krugman has recently emphasised in his opinion in the NYTimes three times:

QUOTE: ’…the stock market is not the economy.’

This comment really summarises the sentiment felt in recent weeks. Markets and economies will likely continue to be more volatile until a cure or vaccine for COVID-19 has been found. On the upside, many world leaders were quick to respond with rescue measures and markets have surprisingly seemed to have rebounded much quicker than some may have anticipated.

So, what lessons can we learn from this pandemic in how to react as a long term investor? How can you react during such an unprecedented crisis? What are some of your options if a second wave has a significant impact or increasing global geopolitical tensions have a further drastic impact?

There are always many factors and circumstances to consider and it’s important to note that every person’s situation is unique and requires careful consideration and advice from a qualified financial advisor. This article simply aims to highlight a few strategies that can be deployed during a bear market.  

What is a bearish market?

A bear market is usually defined as 'a market where security prices fall 20% or more amid widespread pessimism and negative investor sentiment’ .

So what we saw happening in the US (and many other markets across the globe) in February and March 2020 is what we would typically call a bear market. However, it is important to note that although it was technically a bear market, it has also been unprecedented to anything we have experienced in recent human history due to the drastic interruption to global trade.

How do you respond to a bear market?

There are many different strategies that can be deployed during a bear market, and what might be right for one person might be completely inappropriate for someone else. This is not an exhaustive list of options or strategies, but it’s here to provide you with some insight and context when discussing your options with your personal advisor.

As you are most likely aware, investments always carry risk and you could risk losing your money invested, especially when markets are falling, so make sure you have open and honest conversations with your advisor.

What are some of the strategies or options that could be deployed during a bear market?

Buy quality on the cheap

One trend we’ve observed is similar to what fundamental investors have been doing during a bull market: ‘reinforcing two of the biggest trends in stocks: U.S. technology and “quality” stocks […]’.

What that means is strong focus of buying of good stock on the cheap, or growth companies with smaller capitalization. The recent increase of the NASDAQ is a case in point.

The more conservative approach

A more conservative strategy could be to sell equities to increase liquidity. That means putting your investments into bonds, such as corporate or treasury bonds and be more defensive. The key to this strategy is to keep maturities short and to buy back into the equities market when it’s back on the upswing. Given how quickly the market has rebounded recently it’s important to act fast and not miss the boat.

Defensive buying

Another strategy could be to buy on the defensive which means putting your investment in more reliable stock such as utilities or certain industrials. Essentially investing in services that don’t necessarily provide much growth but most economies heavily depend on a daily basis.

Playing the more risky shorting and options game

For someone with a much higher risk tolerance putting cash into riskier portfolios which are more weighted towards equities could be an option. This approach hopes to make returns by applying shorting strategies (which essentially means borrowing stock and selling it with the hope to rebuy it at a cheaper price).

Another approach is to speculate or hedge risk by buying options. Option contracts give the buyer the right (but not the obligation) to buy (called a ‘call’), or sell (called a ‘put’) underlying assets at a specified price on or before a set date. Options are also called derivatives since their value is derived from the value of the underlying asset.  

It’s important to note that strategies such as shorting and options are advanced trading strategies that can lead to tremendous exposure, with no limit losses and limited gains

Play dead

Much like facing a bear in real life another bear market strategy is called ‘playing dead’. What is usually meant by this is to put larger portions of your portfolio into securities such as Certificates of Deposit (CDs) and other instruments of high liquidity and short maturities like zero coupon bonds. A zero coupon bond is a debt security that doesn’t pay any interest, but trades at a discount and renders profit at maturity (when the bond is redeemed).  

This strategy will be heavily dependant on the short term liquidity that is available with your existing portfolio.

Are you a new or a well-established investor?

If you are new to investing buying during a bearish market can be of advantage. Starting out when asset classes are cheaper is a good starting point for almost any portfolio, so if you haven’t started investing already now is an interesting time to start investing in your legacy.

If you are an existing investor make sure to talk openly to your advisor, especially if you have concerns.

The bottom line is: As with any investment or trading strategy, the key is to keep your emotions in check and make rational decisions that work best for you.

If you are a customer of our investment management services (as distinct from managing your portfolio without our advice) you should know that our fund managers are highly experienced in rebalancing portfolios to meet new market dynamics. They regularly deploy a variety of strategies to meet market conditions to generate revenue in the portfolio.  If you engage us for investment management, the better we know you, your situation and your risk tolerance the better we can adjust your investment strategy and execute the right portfolio for you. Unfortunately, we do not offer investment management services to U.S. Persons.  If you are not a U.S. Person, and would like to engage our investment management services, please contact us today.