A bear market offers an opportune time to buy stocks at a discount, making it a lower entry point for those who generally hold off from investing and providing a steeper return in the long term.
Buying when everyone else is selling is a popular investing strategy and one that Warren Buffett practises.
Since the start of 2022, the JSE dropped by over 7%, while the S&P 500 – an index of the 500 largest companies in the United States – fell by 16%. Most losses occurred in the second quarter.
This slump was experienced globally, with The European Stoxx 600 and Japanese stocks dropping 13% and 16%, respectively.
These falling stock prices indicate a weak global economy resulting from recessionary fears caused by the lagging effects of the COVID-19 pandemic and recent geopolitical tensions.
Despite the current market environment, Rand Swiss portfolio manager Viv Govender reminded investors of the long-term opportunities a bear market offers and how to invest in one.
Speaking to Bruce Whitfield on The Money Show, he said a feature of bear markets is widespread pessimism and negative investor sentiment, much like we are seeing now.
“For an investor, especially as a beginner, the best thing that can happen to you is to start investing in a bear market,” he added.
He also noted that while investors would still see returns over the long-term when buying a given stock at its peak, investors will be much better off if they buy when the market is in a slump because they get the shares at a discount.
What is a bear market?
A bear market is defined as a prolonged asset price decline, typically 20% or more from recent highs.
While some sectors of the market haven’t quite reached the 20% mark, many have, and Govender believes that the market will see further drops soon due to persistent energy prices and interest rate hikes.
Two of the most notable examples of a bear market are:
- 2008-2009 financial crisis – The collapse of the housing market, fuelled by low-interest rates, easy credit, insufficient regulation, and toxic subprime mortgages, led to a global economic crisis in 2008. The S&P 500 fell by more than 50% from its previous highs.
- 2020 COVID-19 crash – The 2020 bear market was triggered by the COVID-19 pandemic spreading worldwide and causing economic shutdowns in most countries.
How to invest in a bear market
Bear markets can be scary for investors, but it also offers the opportunity to put money to work long-term while stocks are trading at a discount.
With this in mind, Govender offered some points to consider when investing in a bear market:
- Choose a stock wisely – To ensure a positive return, investors need to make sure you’re buying into a company with a rock-solid balance sheet and good prospects. Govender noted that companies in the technology sector, for example, are very attractive at the moment.
- Don’t try to catch the bottom – Trying to time the market is a losing battle. One thing to keep in mind during bear markets is that you aren’t going to invest at the bottom. Buy stocks because you want to own the business long-term, even if the share price decreases slightly after you buy.
- Build positions over time – Instead of trying to time the bottom and throwing all your money in at once, a better strategy during a bear market is to build your stock positions gradually over time. This approach spreads out your investments and allows you to buy into the market at different times at varying prices that ideally balance each other out versus investing one lump sum all at once. This way, if you’re wrong and the stock continues to fall, you’ll be able to take advantage of the new lower prices without missing out.
- Think long term – Once you have invested in a chosen company or industry, don’t panic and sell if the stock falls in the future. The market is cyclical, and history has shown that the market always recovers. Invest in stocks you want to own for the long run, and don’t sell them simply because their prices went down. Govender added that investors should look at their investments with a multidecade horizon, and when you see a drop of 20%, don’t sell in fear, but rather double down and build your position as described in the previous tip.