For the first time in a decade, Indian investors are witnessing a full-blown bear market. The frontline BSE Sensex index has tanked 30% from its January peak. The earlier crash had seen the index lose 60% of its value. Investors are worried how big the cut will be this time and how they can protect their finances. While the reasons for stock market crashes vary every time, the basic tenets of surviving these events remain the same. If you follow the principles outlined below, you should be able to safely manoeuvre your finances through this challenging phase.
What to do
Create a financial cushion Since severe bear markets are usually accompanied by crippling economic downturns, they can wreak havoc on your finances. Retrenchments, salary cuts or delays in payout are inevitable outcomes of a sputtering economy. Be prepared for the worst. Before you think of making moves in your portfolio, arm yourself with adequate buffer. “A prolonged bear market not only drags down returns but can hurt incomes too. It is prudent to have sufficient buffer for such an eventuality,” says Tarun Birani, Founder and Director, TBNG Capital Advisors.
Build a contingency fund to cover at least 6 months’ expenses. This way you will not be forced to dip into your retirement savings in a cash crunch. Prableen Bajpai, Founder and Managing Partner, FinFix Research & Analytics, suggests clearing pending dues immediately. “If you have cash, personal loan or card dues should be paid off before any investment,” she says.
Reassess risk tolerance You think you understand your risk taking ability? If you assessed your risk tolerance during sunnier days, chances are you assessed wrong. During good times, we tend to be complacent and have misplaced notions about how much downside we can withstand. Finding yourself in the grips of a bear market will upend any haughty notions you may have about your risk appetite. It is in this situation that you must ideally revisit your risk profile. It will yield a more accurate reading. “If you are severely uncomfortable now, perhaps you have been taking more risk than you can realistically handle,” points out Rohit Shah, Founder, Getting You Rich. More importantly, remember to adhere to this version of your risk profile when the next bull market sweeps you off your feet.
Longer you wait for market recovery, further behind you will fall A study found that stocks generate their biggest gains in the first 12 months of a recovery, and that missing even the first month of gains after the market hits bottom leads to substantially lower returns over time.
Data analyzes the five periods from 1970 through 2017 during which S&P500 fell by 20% or more. Source: Schwab Centre for Financial Research and Morningstar
Keep the war chest ready When it comes to deploying money, investors get cold feet in a full-blown bear market. Even when the market recovers, they hesitate to get back onto the saddle. It is only when the market recovers fully that investors realise that they missed the bus. So, the longer you remain on the sidelines, the further behind you find yourself when the market recovers (see table). At some point, you should start making a staggered entry. However, for this you need to have surplus cash in hand.
Be ready to put your money to work quickly. “If you have money you can afford to invest with a long-term view, this point in the market may pose a good opportunity. Invest in tranches,” suggests Suresh Sadagopan, Founder, Ladder7 Financial Advisories. Identify that part of your portfolio that can be liquidated to give you the necessary arsenal. For instance, some of your existing debt funds can be used to provide cash flow. Consider initiating a STP from the debt fund into an equity fund over 6-12 months. Hemant Rustagi, CEO, Wiseinvest Advisors, feels this is the time to deploy a lump sum in phases apart from existing SIP commitments. “You don’t get to see such steep cuts often. Investors should make the most of it,” he says.
Stick to fundamentals
While the root of the current crash is not economic, the upheavals it will bring will play out similar to previous crises. In bad times, typically fundamentally strong businesses sail through. While these do get rocked, they are able to plough through and reach the shore safely even as weaker businesses sink. Better run companies will be able to withstand the turbulence and bounce back quickly. It makes sense to stick with proven businesses now. Do not be adventurous and bet on relatively unknown businesses. “Stick with quality names and avoid aggressive bets at this stage,” says Shah.
Intermittent rebounds in a bear market can fool you into believing the worst is over Instead of trying to time the market, investors should look at staggering their entry into the market over 6-12 months.
Buying the dips can also backfire spectacularly during a bear market If you try bottom fishing—deploying money at a perceived market low— chances are you will burn your fingers badly.
Compiled by ETIG Database
Get that financial plan in place
Investing should never be guided by specific moments; it should be a part of a process over time. If you are like most investors, chances are you have been randomly accumulating investments for your portfolio without a clearly defined purpose for each rupee invested. In the absence of a plan, there is a greater risk that you will make rash decisions about your portfolio during a market upheaval. You may end up liquidating long-term investments that would jeopardise goals far on the horizon.
If you don’t have a long-term financial plan, creating one—and sticking to it—is the best action you could take at this time. “This is a ripe time to have your health check-up done and get clarity on your financial goals,” insists Birani. Consider engaging the services of a good adviser for this purpose.
How previous two bear markets shaped up
Market exhibited prolonged weakness even after 2000 bear run, but gained sharply after 2008 sell-off.
2000
Start date: 11 Feb 2000
End date: 18 Oct 2000
Decline: -39.4%
No. of trading days: 171
2008
Start date: 8 Jan 2008
End date: 9 Mar 2009
Decline: -60.9%
No. of trading days: 286
What not to do
Don’t try to catch market bottom It is any investor’s dream to identify the time when the stock market is about to hit the bottom of its downturn phase. Nothing is more rewarding than being able to ride the recovery to the fullest. But market tops and bottoms are only clear in hindsight. If you try bottom fishing—deploying money at a perceived market low—chances are you will burn your fingers badly. It is alright if you miss the precise point when the market touches bottom. You can position yourself even after the market makes a move upwards.
Do not commit your cash in one shot. A staggered entry spread over several months is ideal. You may not be able to capture the swing in its entirety, but will avoid getting whipsawed by sucker rallies. Says Bajpai, “It’s crucial to stick to asset allocation and rebalance one’s portfolio instead of calling a market bottom.”
Even if long-term SIP has fetched poor returns, stay committed Past data shows that if you continued your SIPs for a bit longer, your returns would have been signifi cantly better.
Source: FundsIndia Research
Don’t review funds now If you find yourself looking at your portfolio value daily, stop now. Finding your portfolio take a knock every day will lead you to question your investing choices. You will start finding fault in individual bets. Avoid reviewing your portfolio at this point so as not to form a misguided opinion. “Do not look at portfolio performance for the next few months,” advises Birani.
Most of your equity funds will seem like a horrible choice whereas the gold fund will look like the best decision ever. You may be tempted to pull out of equity funds and redirect the money into gold or stay in cash. Any review you undertake at this stage should be purely from an asset allocation perspective. If the asset mix has changed substantially from desired levels, rebalance portfolio to its original shape. Leave the microscopic review for later. “Do not exit for lack of return. Do it if your asset mix warrants rebalancing,” says Shah.
Don’t change investing strategy Don’t try your hand at a new investing approach in the midst of a bear market. If you are a different investor today than what you were before the bear market started, you are not doing it right. It is during a bear market that investors shift strategy. Overwhelmed by panic, they are prone to abandon years of investing principles. For instance, investors following a focused strategy may suddenly start diversifying to the extreme. This fickle nature undermines long-term strategy which may come in the way of achieving longer term goals.
In past crashes, recovery time was varied
In 2000, it took 806 days, while in 2008, Sensex recovered ground in 411 days.
Don’t get overly defensive After seeing relentless erosion in the market, you might want to throw in the towel and turn ultra-cautious. Do not succumb and press the panic button. “Avoid rash decisions and exiting an investment mid-way. Doing so turns the whole exercise of investing futile, ending in a bad investing experience,” says Bajpai. If the market is down 25% in a month, it doesn’t mean that in four more months you will have lost everything.
Sure, you can go 100% into cash now. This way you are secured for the rest of the bear market. But when do you get back in? By the time you firm up the resolve to do so, the market may have moved on. Opportunities abound when there is panic, but you can’t benefit from them if you are storing money under the mattress. Sadagopan argues, “Do not withdraw from equity thinking that when the markets starts to recover you will put it back. It is very difficult for anyone to predict when the markets will recover and when it does, human psychology will prevent us from getting back in.”
Some may try to reduce risk by spreading their money across multiple companies, sectors and asset classes. This may help you temporarily arrest the downside and cushion your portfolio. But overdoing it will prevent you from gaining meaningfully when the market recovers. Markets tend to move in cycles. Bear markets follow bulls and bulls follow bears. When everyone expects the worst, that’s usually about the time markets turn around.
Don’t do nothing at all An oft-repeated advice during a bear market is to ‘play dead’ or do nothing. Essentially, you let your investments run and don’t tinker with your portfolio. This advice may not be suited for all. Actually, how aloof you remain should be guided by your age or time horizon for each invested rupee. For younger investors, who would not need the money for at least 8-10 years are indeed better off doing nothing—at least to the extent that you remain calm throughout. “Continue with your investment process. But make sure you realign your portfolio when required,” insists Rustagi.
However, if you are only years away from retirement or otherwise need to draw money within the next few years, doing nothing would be harmful. It means you are willing to accept all the risk of the market at a critical juncture. Equity markets can take years to fully recover. Keep any money you need in the next five years out of the stock markets.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
