"Investing in bear markets can wear the investor down, which means you need a plan; a robust plan, that will see you through the emotional roller coaster ride of bear market share volatility and place you in good stead for the recovery."
Global share markets, bar the Nasdaq in the US, have suffered sharp falls since the outbreak of COVID-19, and analysts are talking about a bear market.
The Athens Stock Exchange has dropped 35% this year, the Sri Lanka Colombo Stock Exchange Index and Vienna Stock Market 31% and the majority of countries have suffered losses of 20% or more this year or since the coronavirus was detected in Wuhan, China.
Although the financial implications of a bear market can vary, typically, bear markets are marked by a 20% downturn or more in stock prices over at least a two-month timeframe. At some point during a bear market, investors will typically try to capitalise on low stock prices and buy shares in the expectation that they rise back to previous levels and beyond over time.
“I think about what has happened in other bear markets going back to 1929, and the average 13-month advance was 50%. We have a very good possibility of retracing our steps and challenging the old high,” Sam Stovall, chief investment strategist and market historian at CFRA Research, told CNBC.
Investor and author Danielle Ecuyer, of Shareplicity, has been investing in shares for more than three decades, both professionally and personally.
“Share markets during recessions aren’t called ‘bear markets’ for nothing. The honey pot lures not only the big bad bear but us poor unsuspecting share investors; just when we think it is ok to buy back into the share market, the promised profits are dashed as the bear swipes us and reminds us, it’s only a bear market rally,” she told The CEO Magazine.
“Bear markets are characterised by hope and reality. Hope of better economic times (improved earnings for shares), leading to share market rallies. Reality that hope is only that and the improvement in earnings has been delayed yet again, leading to share market selloffs.
“Investing in bear markets can wear the investor down, which means you need a plan; a robust plan, that will see you through the emotional roller coaster ride of bear market share volatility and place you in good stead for the recovery.”
Ecuyer, whose first book Shareplicity: A simple approach to share investing has been released, shares five tips to help you manage the grizzly bear to see you through to the ebullient bull market.
- Control – As investors we cannot control what happens to share prices. We can only control how much cash we invest and when we invest. Although the mantra is ‘buy low’ and ‘sell high’, the reality is we can only tell when low and high were with hindsight. This means before you start any investing, the aim is to work out how much cash you can invest and over what period. You want to avoid racing to put all your hard-earnt savings into the market only to see the share price fall. Nor do you want to just sit in cash as bear markets can end as quickly as they start, and you want to benefit from that. It’s prudent to spread your buying over time.
- Basket A shares – Picking the right shares is the most challenging for all investors. What is the right share in a recession? And how can you separate out the winners from the false dawns? In deep recessions like Australia will most likely experience in 2020, the share market has become noticeably divided. Basket A can be considered the cyclical shares, think the banks, Sydney Airport and travel exposed shares, building material companies, REITS and discretionary retailers. There is nothing wrong with cyclical shares but hoping they will return to the pre-Covid 19 share prices could be misleading. Buy cyclicals that have real and identifiable earnings turnarounds and be wary of chasing high dividend yielding shares, they will most likely not live up to the expectation.
- Basket B shares – These are the more resilient shares, that will continue to achieve earnings and dividend growth and were the first to recover after the March 2020 crash. They include, the healthcare companies CSL and Resmed and the technology companies like Altium, Appen, Xero and Technology One. These companies are characterised by having good supply chains, demand for their services, operate in growth markets, and can give you some confidence that largely irrespective of what form the economic recovery takes place, these shares will allow you to sleep well at night. Earnings defensive shares like Woolworths and Coles (we all need to buy groceries) fall into this basket. There is no right or wrong basket to buy from, you can even buy some from each.
- How much cash you have to invest – The smaller the amount of cash, the better it is to buy an ETF (exhange traded fund that reflects the underlying basket of shares in the Australian market, for example), rather than trying to pick the one or two winning shares. As you have more cash to invest you can look beyond the ETF and possibly pick one or two shares. In bear markets it is best to stick to the large companies so there is ample liquidity to buy and sell the shares if you need to.
- Be receptive to change – This is a really important point. Sadly, we don’t always get our share picks right. It is okay to change your mind (although not daily). We are all living in a great period of change, and what may have worked in the past is not a guarantee for the future.
“Whilst bear markets may seem challenging, they offer an excellent opportunity to invest for long term wealth creation. Investing is very personal, so before you start make sure you have a plan, do your research and try not to panic if the share market falls. Share markets go up and down but, through the passage of time they will rise and make you money in the future,” said Ecuyer.
Danielle Ecuyer has been involved in share investing in Australia and Internationally for over three decades, both professionally and personally. Her experience and knowledge has been combined to help new or existing investors with long term wealth creation and income generation in her first book Shareplicity: A simple approach to share investing.