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- 🤔 Are We In A Bear Market?
🤔 Are We In A Bear Market?
🏋🏻♂️ Preparing For Market Declines in The Future
Madhu, Altcase
November 17, 2024
Welcome to this week’s Altsights!
The NIFTY 50 index is down by 10.24% since the end of September 🔻
The mid and small cap indices are down by similar levels.
This begs the question - Are we in a bear market? 🐻
Technically speaking, the NIFTY 50 is not in a bear market yet. We are in a stock market correction 📉
What’s the difference, you may ask? Good question!
I discuss the key differences between bear markets, market corrections and crashes in today's newsletter.
More importantly, I discuss how you can prepare for market declines.
Market Correction vs. Bear Market vs. Market Crash
Stocks lose their value in all three scenarios.
However, the severity and speed of loss in value of stocks differentiate them.
Feature | Market Correction | Bear Market | Market Crash |
|---|---|---|---|
Price Decline | 10-20% | 20% or more | Sudden drops - as high as 25% |
Duration | Weeks/months | Months/years | Days/weeks |
Typical Triggers | Profit-taking in a frothy market, geopolitical events | Drop in corporate earnings, negative economic data | Black swan events, economic, political or sovereign crises |
Recent Examples | Nov 2024 due to FII exit (10% correction) | Feb 2016 due to global factors (26% drop) | COVID in 2020 (market crashed by ~40%) |
Typical Frequency | Once a year | Once in 3-6 years | Once in 8-12 years |
Markets Have Always Been Volatile 📈📉
We expect the markets to deliver 12-15% annual returns over the long term 📊
This is in line with what Indian stocks have delivered for many years now ✅
However, there is a cost that we have to pay for these returns - Volatility 📈📉
As you can see below, market declines of 10%+ are quite frequent. We should also be prepared for the occasional 20-25% decline.
To earn the 12% annual returns Indian stock market delivers, investors need to be able to deal with frequent declines of 10%+ and occasional declines of 20%+
Preparing for Market Declines 🏋🏻♂️
The ongoing market correction is probably the first one you have witnessed. But it surely isn’t going to be the last.
It is okay if you were not prepared for it. But don’t be unprepared for the next market decline.
Here are 3 adjustments that will help you deal with market declines better -
Diversify Across Asset Classes ✅
Stocks are volatile and decline frequently 🔻
But:
FDs and bonds are neither volatile nor do they decline frequently
Gold tends to rise when stocks decline and vice versa
Real estate typically doesn’t decline sharply
A simple way to experience lower declines than the market is to diversify your investments across different asset classes.
Source: DSP MF
De-Risk As Your Goals Approach 🦺
I believe in the goal-planning investment approach.
You know what you are investing for, how much to invest and when to call it quits.
However, sudden market declines can play spoilsport, and we may fail to achieve goals despite being so close to them.
Imagine saving for your kid’s education that was supposed to start in June 2020.
Even if you had accumulated enough by the start of 2020, the corpus would have fallen short of the target because of the once-in-a-lifetime pandemic!
To avoid such a situation, I suggest Glide Path Investing 🛝
The concept is really simple:
Your portfolio should be the riskiest (highest equity allocation) at the start.
However, as you approach your goal (in terms of time and corpus accumulated), you should start de-risking by reducing equity allocation and increasing allocation to safe instruments.
This ensures that sudden market declines don’t derail your plans.
You can read more about it here → Glide Path (Investopedia)
Deal With Your Emotions 😐
This is not exactly an adjustment in your investments but an adjustment in your mindset.
It is not unusual to become emotional regarding money matters like investing. However, acting emotionally is a recipe for disaster 🙅🏻♂️
Here are the two emotions we feel the strongest when it comes to investing:
🤑 Greed → When the market is going up and you feel confident to invest more money
😨 Fear → When the market is on a decline and all you want to do is withdraw and FD
Warren Buffet says you should do the exact opposite:
Be Fearful When Others Are Greedy and Be Greedy When Others Are Fearful
While all of us can’t have nerves of steel like Mr. Buffet does, we can surely strive to be better at managing our emotions and investments.
Hope you liked this week’s Altsights.
See you next week!
Cheers,
Madhu,
Founder, Altcase