A BEAR MARKET SURVIVAL GUIDE
Mark Lister, 15 June 2022
It's official. We're in a bear market, which is generally considered to be a more than 20 per cent fall from a recent peak.
Earlier in the week, the S&P 500 in the US and the local NZX 50 index both breached that threshold.
This is the tenth bear market we've seen in US shares since 1960, and the first since the emergence of COVID-19 in 2020, and before that the GFC.
During the previous nine, the S&P 500 has ended up more than 35 per cent lower (on average) with the typical duration a little more than a year.
That's a confronting prospect. Having said that, all markets declines are different and it's impossible to say when or where this one ends.
In terms of a bear market survival guide, my first piece of advice would be not to panic. It’s hard not to feel overwhelmed by all the negative news we’re hearing.
However, we don’t make our best decisions when we panic. Stay calm, take a step back, and lean on your financial adviser or KiwiSaver fund manager for support and guidance. This is when they will earn their keep.
Don’t be afraid to take a little bit of risk off the table. There’s nothing wrong with a bit of de-risking, especially if you’re sitting on strong gains, if your riskier assets have grown to represent a larger part of your portfolio than intended, or if it’ll help you sleep at night.
Hold a bit more cash than usual. If things are going to get worst, or at the very least remain volatile, having a bit of dry powder means you can take advantage of opportunities amongst the carnage.
Consider adding to your conservative assets. With yields of more than five per cent now available for good quality securities, fixed income is offering more attractive prospective returns than we've seen in years.
That's particularly good if you’re one of those people who is a little cynical about whether the Reserve Bank will be able to increase the Official Cash Rate as much as it intends without running into trouble.
Within shares, it's not too late to de-risk and inflation-proof your share portfolio.
Looking back through previous periods of economic weakness can help us identify which parts of the market traditionally hold up better than others.
There have been four recessions in the US since 1990, and two sectors have proved most resilient, outperforming the broader market on all four occasions – consumer staples and healthcare.
At the other end of the spectrum, financials and technology have (on average) been the laggards during those four periods.
Inflation is at the epicentre of the current sell-off, and while we all hope it will dissipate over the next 12 months, it looks set to remain stubbornly higher than central banks (and investors) would like.
Investors would be wise to consider an exposure to companies, sectors and regions that have traditionally proven resilient during periods of high inflation (such as infrastructure, real estate, farmland and commodities).
If your investment objectives haven’t changed, neither should your strategy. Most of us are investing in the hope of meeting our long-term objectives, which are usually some ten or twenty years into the future.
With that in mind, it makes little sense to react to this weekly, monthly or even yearly volatility.
We know that over longer timeframes growth assets like shares (or property, for that matter) will deliver strong returns with remarkable consistency. Investing isn’t about chasing the ups and downs of the market, it’s about managing a well-constructed portfolio in line with your goals and objectives.
Stay diversified, rather than being at extremes. Economies, markets and currencies ebb and flow, so hedging your bets across different asset classes, geographies and sectors is the safest approach for most of us.
If you’re fully invested in shares you open yourself up to the full force of volatile periods, but you’ll do yourself just as much of a disservice by sitting on the sidelines and missing out on the strong periods.
That's an important point for newer investors to remember. If you’re in the accumulation phase of your investment journey, volatility and weak markets are your friend. For those with 10 or 20 years until retirement, or even longer, you could argue the lower prices go the better.
We never know what’s around the corner for financial markets, but for those looking to build a portfolio, rather than reap the benefits of an existing one, be willing to take advantage of this weakness. Take your time, do so patiently, and in instalments.