Stock Market has fallen by more than 30% in the last one month. The reason is known to all. Its Coronavirus epidemic. All the sectors like banking, IT, FMCG, real estate are down by not less than 30%. Some of them are even down by 50% in the last month. In this panic like situation, you as an investor what should do? How to invest in a falling market? Today, in this article, we will discuss bear market strategy and how to invest during this bear market phase.
Bear Market Strategy
My friend Amit has started investing in the stock market about a year back. He wasn’t a mature investor at that time. He knows me that I keep on doing some weird stock market analysis all the time. So he approaches me and asking for the stock tips.
I have denied him that I don’t have any stock tips. He said to me that, you don’t want me to make money in the stock market hence you are not sharing the tips with me.
I said to him that I really don’t have any tips. I always invest in the stock based on the fundamentals of the company. He didn’t believe me and goes away. Sometime later I got a call from him that he found a broker who gives him a good tip on a regular basis and he had already made good money in the stock market.
Last week I got a call from him and he was literary crying. He lost all his money invested in the stocks during this market fall. He lost his capital as well and left with very little money in the account. I would like to ask you a question here:
What has happened to Amit? Why he lost all his money in the stock market?
There are two main reasons for his loss in the stock market.
- He has invested in the wrong stocks.
- He didn’t realize his risk appetite.
So here are some of the tips to invest during the bear market.
Evaluate Risk Appetite
How much money you can let go of in the stock market? I mean the money you can afford to lose in the stock market. It could be any amount or the percentage of your capital deployed in the stock market.
You need to evaluate your risk appetite and your risk profile.
Every investor in the stock market knows there is a certain risk associated with the investment in the stock market. So fundamentally, he/she knows that there is a risk in investing in the stock market. Why someone should invest in the stock market when there is a risk?
Whenever you are investing in the stock market for the first time, you think that let me try something new. Let me take some more risks. It looks good when initially you will make money in the stock market.
But the moment the market starts falling down, you will realize that you have invested in the wrong stocks and your money is getting eroded quickly. At that moment if you have not kept a tap on your losses, then you will in big trouble.
Also Read: Dirty Stock Market Secret
Keep Cash in hand
In the falling market, you should always keep cash in hand. There will be many good opportunities for buying in the stock market. Many fundamentally strong stocks will be available at the dirt-cheap rates. You should not miss this buying opportunity in the falling market.
Don’t invest all your money at one go. Always invest your money in the tranches. Because you never know the bottom of the stock market. (Nobody knows). So don’t try to do bottom fishing.
So if the market goes further down, you have an opportunity to buy stocks at even lower price and thus your buying average will come down. When the market will recover (sure it will) then your portfolio will jump faster because you have purchased it at a lower price.
One thing you must keep in mind that you must invest in good quality stocks only. Don’t buy any cheap or penny stocks and try to do an average by buying more and more at a lower price. This trick will not work for the penny stocks.
Hedge the market
Hedging is slightly an advance subject when we talk about the stock market investment. But if you know it and do it rightly, you can never be in loss in the stock market.
Hedging is covering your losses in the cash market with transacting in the futures and options. Let me explain this with an example.
Say, for example, you have purchased 100 shares of HDFC Bank at ₹. 1200/share.
The current price of the stock is around ₹ 970/share. You are in a big loss of ₹. 230/share. Now if you would have sold this stock in futures when the price was let say ₹. 1100/share. Then you will gain ₹. 130/share which will help you to recover your losses in the cash market.
You don’t have to sell your cash position. Because the price of that stock in the cash position will recover in the future.
Remember one thing, you must hedge in the top 5-10 stocks of the Nifty 50 only. don’t buy any share and try this trick. else you will lose big money.
Let me explain this with a small conversation between an investor and the financial advisor.
Equity Investor: Kya lagta hai Market ? I am scared now. Dar Lagta Hai !! ?
Advisor: Do you think that this type of Correction in the Market is the first time ever? ?
Investor: Yes ..! ?
Advisor: Listen, Sensex was corrected more than 10% many times in the last 39 years. This is not new. ?
Investor : OMG.. ! Really ?. ?
Advisor: But remember. Corrections are temporary and growth is Permanent ?
Investor : How? ?
The year 1992 – Sensex down by 54% in a year and up by 127% in the next 1.5 yrs.
The year 1996 – 40% down in years and 115% in next year
The year 2000 – 56% down in 1.5 years and 138% up in the next 2.5 years.
The year 2008 – 61% down in 1 year and 157% up in next 1.5 years
The year 2010 – 28% down in 1 year and 96% up in the next 3 years
Investor: Oho… Meaning every Correction is an opportunity to invest & not to be scared… !! ???
Advisor: Remember Corrections are temporary and Growth is Permanent.
So be patient and follow the bear market strategy and I am sure you will never be in losses in the stock market.
Sit tight and do nothing
Well, there are times when you just don’t need to do anything. Let the phase pass away and don’t lose your patience in the bear market. There are many technical indicators that tell you that this is the time to DO NOTHING.
Technical indicators like RSI and VIX are the indicator which tells you when NOT TO BUY a stock in the market. It basically tells you the high and low points of the stock market.
Conclusion: Bear Market Strategy
Hope the above bear market strategy will help you to calm down and invest in the good stocks at the lower price.
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