Can you Gain from bear market?
Yes, it may seem to you a very peculiar question. How one can get benefit from a bear market. But do you know the long term equity investors get huge benefit only from this downturn period?
I know bull market makes you happy but on the other side, it is also true that bear market gives you an immense opportunity to become wealthy. I have some handy tips for you to take full advantage of the bear market.
Before suggesting about the tips, I would like to share with you some basic interesting facts on equity market.
There are two segments of people in equity market, one is general investors and the other is value investors. General investors invest in the direct equity market only when the market is in Bull Run and they did not like to sell off their holdings when market is in uptrend because they influenced by their greed and market rumors. These general investors sell off their holdings when market fall down a certain percentage from the peak and there is news in the market “Bear time has come”.
Another segment of investors are the value buying investors. They have confidence in the market. They know very well that up-down is very common in the equity market and they take full advantage of this swing of the market. They invest in the market when downturn is going on and they sell their holding when market is continuing their uptrend. Specifically speaking when the general people is investing in the equity market even transferring their fund from the liquid &emergency fund and equity market has already has a sharp up movement, the value buyers sell off their holdings and stay away from the market.
The duration of the cycle in equity market generally is 4-6 years, but of course it may vary. Normally the bull run may continue for 3-4 years and bear market may continue for 1-3 years. As per the past data, the downside % of the market from its current peak varies in between 15-45%.
My suggestions for Bear Market
(i) Take advantage of every down movement:
If you are very new in stock market and want to invest lump sum amount in direct equity stocks for long term basis (more than 5 years) then this bear time is an excellent opportunity for you.
Suppose you want to invest $30,000 on long term in equity market and you have no knowledge on equity market. Then invest $3000 on first 3% downside movement in the market and increase this investment amount by $500 on every 3% downside movement.
Market downside % from the peak Investment amount in every step ($) If market turns around from any situation then wait. Sell off your stocks when your stocks reach at its pre-defined target or take the profit part when you have gained at least 20% from very good stocks.
In this way investing will help you to take advantage of both the situation. My suggestion is for the newbies is that if you are sure that the stock will give good return in long-term then take only the profit part of every 20% increase. In this way, after a certain period and with dividends and bonus part, your stocks will be free.
(ii) Gain from option market: –
If you are a long-term investor with good knowledge on market index then take sufficient amount of put to cover your position during this bear market. Hold every option position not more than a week and sell off your position every 3-5% decrease in market index. Again take fresh position depending on the market situation. In this way your position will be hedged and you’ll also earn good profit.
I generally earn 20-50% profit on every put during the bear market. If you are good in option-strategy then take advantage of these strategies also.
(iii) Intraday Stock Trading:
If you have sufficient amount of good stocks in hand then you can gain from your holding. Every good Broking companies publish the support/resistance level of each good stock on daily /weekly basis; keep an eye on those reports.
Suppose, you have 100 shares each of Companies A, B and C. If on a day, any of your holding companies shares are going downside and have broken a strong support line then sell that share from your holding. After 1-2% decrease of the share price, buy back your shares. In this way, you’ll gain good profit in the same day and your shares will be in your hand.
Of-course, this downside percentage for booking profit will depend on that share type, normally if the beta of the share is very high then your gain will be much higher than the shares with low beta. If you want to know in details regarding secrets of becoming good intraday trader, then join my course: How to become a successful day trader. Normally the course price is $95 but for our readers, the price is only $10.
These three methods are very useful in bear market scenario. As I’ve discussed a normal equity market cycle continues for 5-6 years, yes, being a general investor you can take it as 5-6 years for your investment purpose. But, if we go in depth then these cycle time goes from day to hundred years depending on their magnitude. The small cycles are part of a big cycle. Currently we are in a BIG BULL MARKET CYCLE; so long term investing is beneficial.
While doing long term investing, always take good blue chip stocks in your portfolio, don’t depend on any rumor and diversify your portfolio.
Some tips for a good long term portfolio:-
(i) Suppose you have no knowledge on stock market but want to invest in equity market and confused by different recommendation. Then watch the components of the leading index of your country and see the weightage of the companies in the index. Then choose the stock which has highest weightage in your favourite sector. This is the simplest method of choosing stock.
(ii) Diversify your portfolio in different sectors, like- private sector banks, public sector banks, IT, heavy engineering, FMCG, etc.
(iii) Do not keep more than 15-20 stocks in your portfolio. At least 4 stocks in different sectors are required for diversifying.
(iv) Normally the equity investment part in your total investment should be 100 minus your age but this also depends on different parameters. Check your RISK APPETITE here.
(v) Do not make one time bulk investment in equity. Make equity investment in step by step.
(vi)Invest for at least 4-5 years. Don’t invest money in equity which may be required in 1-2 years. Keep that money into debt fund or FD/TD.
(vii) Don’t go for Future & option if you have no knowledge on these.
Conclusion: Try to maintain your portfolio in a balanced way (Equity+Debt+Liquid) and review your portfolio time to time basis depending on your current financial position.