How to navigate bear markets: a beginner's guide

Investor trying to tame bear market

Put simply, bull markets are sustained periods of market growth and bear runs are sustained periods of losses. Remember, bears attack by swiping 'down', while bulls throw their horns 'up'.

The terms are used loosely in the financial press, but for equities to enter official bear territory, stock markets must fall by at least 20 per cent over a minimum of two months. A crash of 10 per cent is called a 'correction'. So is a 20 per cent dive if it lasts less than two months.

And so, after months of low oil prices, question marks over the global economy, slower corporate profit growth and full valuations, the FTSE 100 slipped into bear territory on Wednesday lunchtime, falling as low as 5639, down 20.8 per cent from a record high of 7122 in April 2015. It was joined by Japan's Nikkei index and the French CAC.

BEAR MARKET STRATEGY

The official mantra for all investors is 'buy low, sell higher', but, rather than buying the dips as you would in a bull market, investors switch strategy during bear markets and use market rallies to sell.

Of course, markets don't fall in one uninterrupted move. There will be 'black' days, and selling can gather momentum over a number of weeks as panic sets in. Bear markets as a whole, though, typically last many months, or years.

As well as painful capital losses on share portfolios, there are also wider implications for the economy. Any significant erosion of business confidence could curtail investment - much like the oil sector - impacting employment and growth. Already, government coffers are losing billions in tax receipts as low oil prices hit industry profits.

The chart above, courtesy of data from Sharepad, shows the last two bear markets - the early millennia dotcom crash and 2008 financial crisis.

Typically shorter than bull markets, bear runs can be brutal and last an average 12 to 18 months. But they can also be highly unpredictable and volatile, warns Rebecca O'Keeffe, head of investment at our sister website Interactive Investor.

'Bear markets typically see falls in the range of 30 per cent, but the most recent bear market in the height of the financial crisis saw many major markets lose over 50 per cent,' she adds.

'Markets typically recover within a year, but one of the key reasons for the current falls is lower oil prices and pronounced selling from sovereign wealth funds. While I am optimistic that prices will recover, we may need oil prices to stabilise and start rising before we see a pronounced move higher.'

It is also worth pointing out, though, that some of the biggest rallies of all time occurred during these bear markets. They either provided investors who regretted not having sold before the crash with an exit strategy, or generated big profits for brave - or lucky - investors who bought at lower levels.

The FTSE 100 jumped by over 700 points, or 16 per cent, late September/mid-October 2001: a recovery after the 11 September terror attack on the World Trade Center. In October 2008, the FTSE 100 surged 602 points, or 15 per cent, over two trading sessions.

It fell back again before rocketing a few weeks later by 26 per cent to 4639. Also, in the two months after the March 2009 low at 3460, the index rose over 1,000 points, or 31 per cent to 4520.

SURVIVAL TIPS

Regular contributor to Interactive Investor Lance Roberts, 'never' suggests being in 'all cash', but does currently believe investors should use these rallies to reduce the equity risk in their portfolios by banking profits, moving trailing stop-losses to new levels and reviewing portfolio allocation in line with risk tolerance.

The one thing investors shouldn't do, however, is hit the sell button in a blind panic.

'The panic is being overdone,' explains Nigel Green, chief executive of financial consultancy deVere Group.

'We need to see the bigger picture. For instance, the global economy is growing around 3 per cent; and whilst China's economy - which is the focus of so much of the recent sell-offs - has slowed, there's still growth, strong consumption, and indeed the world's second largest economy does look relatively stable.'

As stock markets are generally quite predictable over time, rising over multi-year periods, long-term investing is the most reliable way to generate capital growth. By investing small amounts regularly, a pound cost averaging strategy is favoured by many.

With the FTSE All-Share index sliding 22.7 per cent from its 2015 April high, investors may be able to find value in some high-quality companies. Carefully consider any potential buying opportunities, as guessing the bottom with any great accuracy is near-impossible in a bear market.

For protection against global headwinds, portfolios should be diversified across asset classes, sectors and regions, with investors keeping some powder dry for emergencies, says Green.

This advice mirrors market sentiment. Three-quarters of investors polled by Interactive Investor said they are hanging on to their holdings, while 37 per cent believe now is the right time to buy.

'Global equities remain under severe pressure, with many markets already in bear territory and others heading there fast. With every upturn being followed by steeper falls, investors are understandably becoming increasingly wary of committing new cash to the market,' O'Keeffe explains.

'While concerns about China, global growth, the oil price and even US politics may all add to the fear factor, the current sell-off has taken stocks to historically very attractive valuation levels. At some point the market is going to turn and history may well view this as a golden buying opportunity.'


Subscribe to Money Observer magazine

 

Comments

Post new comment

The content of this field is kept private and will not be shown publicly.
By submitting this form, you accept the Mollom privacy policy.