Corona has wreaked havoc, and investors across the globe have witnessed short phases of bear market. Amid loss of jobs and closure/slowdown of tradition businesses, many are turning to benefit from the stock market. However, the carnage has also spilled in the capital markets, making it a tough nut to secure profits through investments. The dilemma faced by common investors is - what to do during such bear market? In this article, we look at a few do's and don'ts, including what trading and investment strategies to follow in the stock market during such downturn.
Avoid Panic Selling
Unless you are in desperate need of money, avoid selling your holdings during a recession. As found on a social media platform: 'Peter Lynch delivered a 29 percent CAGR at Magellan fund. But the average investor in his fund earned just 7 percent per year. Why? Because they rushed in after performance was good and redeemed the fund whenever it underperformed.' This small tale indicates that taking the exit decision at the wrong time can kill your returns. Panic selling does not help, and should be avoided if one is not in need of urgent capital.
Tame Your Investment Fears
History has it - the stock market has continued to rise despite several instances of big recessions. World War I and II, the Great Recession of 1929, the market bloodbath of 1987, the dotcom bubble burst of 200, and the subprime mortgage crisis of 2008 - are few such examples where big declines were observed in the short term, but those who held on in the longer run emerged as winners. Investing is also a psychological matter, and one must need to tame their intermittent fears during the bear market.
Accumulation Opportunities with Cost Averaging
The solid businesses have known to stand the test of times. If there were many dot com companies that fell apart during the Internet bubble burst of 2000, there were also the Amazon.com Inc. (AMZN) and Alphabet Inc.'s Google (GOOGL) which continue to rule the market ever since. Such short term recessionary periods are excellent opportunity to accumulate more stocks of good businesses by using the dollar cost average techniques. Explore the benefits of averaging in the third section of this real-life demonstration which benefits on purchasing during price declines Is SIP really a good investment method?
Look for Value Investing
Legendary investors like Warren Buffett are known to hunt for valuable businesses at discounted prices. That has been the key measure for his success. See more, Warren Buffett's Stock Picking Indicators Common investors should also attempt to look for such value-based stocks with robust financials and business models, as they have much higher chance to wither the storms of recession compared to other random stock picks.
Defensive Sector Stock Investing
Public spending takes a hit during recession. The worst hit are items of luxury like cars, travel, resorts - which are typically categorized as Consumer Discretionary, and such stocks should be avoided. The other defensive stocks, like Agriculture, Basic Industries, Precious Metals and Healthcare - for instance, are considered to be a safer bet.
Short Stocks for Short-term Profits
Skilled and experienced traders can also consider shorting sector-specific stocks. This involves selling the stock you don't own at a certain price, with a hope that its price will fall down and you can pocket the difference as profit. However, this is suitable only for experienced investors and active traders. As people avoid luxury spending, some sectors which may be suitable for shorting during bear market include Airlines, Motor Vehicles and Amusement & Recreation.
The Bottom Line
While bear markets are undesired, they are also unavoidable. One must be mentally as well as financially prepared to face them and take the hit in the short- to mid-term. Such times offer excellent opportunities to investors to pick up mult-bagger stocks at low price, provided done right. Look for sound businesses of value, and avoid lesser known stocks.
Following is a list of top 10 stocks which are part of the S&P 500 index, and have the highest EPS values.