Economists are forecasting a bear market throughout 2023, but it is not all doom and gloom for investors. Making calculated investment decisions during a bear market may seem like a daunting prospect at first, but armed with the right information and various strategies, you may be able to make it work to your advantage.
Here, we explore ways that you can manage risk, bolster your portfolio and navigate the next bear market in Australia.
Are we in a bear market in Australia?
In simple terms, a bear market is when a major stock market index experiences a decline of 20% or more over a sustained period, typically two months. In contrast to a bull market, defined by widespread securities growth, bear markets are usually when investors take a more cautious or defensive approach to their portfolio.
As investor confidence is generally low during a bear market, trading activity tends to decrease, and dividend yields may also lessen.
So, is Australia currently in a bear market? The general consensus is that, yes, we are. Even though the market experienced somewhat of a rebound in late 2022, equity strategists advise investors to brace for more volatility throughout 2023.
Tips to help you navigate a bear market
There is no set timeline for when a bear market will end, however, they can last from a year on average to more than three years. That is why it is important to prepare yourself for an extended bear market. To help you navigate this potentially challenging environment, here are some tips that may be useful.
Tip #1: Find an ideal entry point
While some investors may decide to sell off assets in the wake of a bear market, others with a long-term strategy may feel this is the time to buy and hold. If they believe in a stock’s future performance, they may be able to enter at an attractive price point during a bear market and then reap the financial benefits if the stock price surges during a bull market.
Alternatively, if you are looking to short-sell stocks, you might be happy about bear markets. However, be aware that short selling is an advanced trading technique that carries considerable risk.
Tip #2: Explore dollar-cost averaging
While staying up to date with the market and its movements is important, it can be difficult to determine exactly when you should invest. Rather than waiting for highs or lows, dollar-cost averaging is a strategy that sees investors build their position over time, investing equal amounts at regular intervals.
This long-term strategy may help mitigate some of the risks associated with trying to invest at the “right” time or making sudden, emotionally-fuelled trading decisions as the market shifts.
Tip #3: Stick to your investment strategy
While everyone has their own style when it comes to how they invest, ultimately, there are only two types of people in the stock market: investors, who hold for the medium- to long-term, and traders, who jump in and out of stocks over the short term.
It can be scary when entering a bear market, but that doesn’t mean you should completely overhaul your existing investment strategy. Operating in an unstable market can lead to unreasonable decision-making, especially if you are inexperienced with bear markets. It is important to stick to a style of investing you are comfortable with and use this time to acquire more knowledge.
Tip #4: Reframe the market as being similar to your super
Depending on your sensibilities, a bear market may be the best time for you to slow down and think about your long-term aspirations for your portfolio. Treating it as a long-term asset – in much the same way as you treat your superannuation – can help you minimise the risks of overthinking your strategy and buying too many stocks that may drop further.
Similarly, even if your current portfolio may be losing money in a bear market, that doesn’t necessarily mean it is time for a sell-off. You never see super fund managers turning their investments into cash at the first sign of trouble. It is a long-term asset that should be treated as such – after all, there will always be ups and downs in the market.
Tip #5: Don’t make sudden moves
One strategy that some investors deploy during a bear market is to “play dead”. In other words, they recognise that they need to survive a potentially years-long bear environment, so their previous bull strategy will no longer help them succeed in the current climate. When the price of stocks is at historic lows, it is also important not to get carried away with market rallies.
When a bull market suddenly takes a turn and heads for bear territory, it can be hard not to react and start selling assets. Remember that the market is cyclical, and this is simply another environment you must learn to navigate. As always, do your due diligence, acquire knowledge about managing your portfolio in a bear market, and always factor in your risk tolerance.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments. This material has been prepared without taking any particular recipient’s investment objectives or financial situation into account, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.