After all has been said and done, are you still wondering if we are in a bear market or if recession has really set in? And does it matter hugely to your investing strategy if it’s one or the other? A bear market is a market condition in which the prices of securities are falling or are likely to fall substantially. Generally, a fall of 15-20% in the key stock indices is seen as an entry into a bear market.
A recession, meanwhile, is a significant decline in overall economic activity—industrial production, employment, retail trade, etc. Technically, an economy is said to be in recession if it records two consecutive quarters of negative economic growth, as measured by the country’s gross domestic product or GDP.
By these definitions, our economy is far from a recession. But that is little consolation. What matters to you is how this affects your portfolio and investing strategy. What we have here is a collection of hints, tips and strategies from a range of sources that will allow you to ride out a bear market or a recession with some minor belt-tightening measures.
Be realistic. Whether it’s a bear phase or a recession, it’s part of the business cycle and there’s nothing you can do to prevent it. We have said it often enough on these pages: don’t panic. At the same time, don’t assume that things will go on as they did in the recent bull run. Be prepared for some losses, and more important, be prepared to sell and cut your losses. Have a stop-loss target for your investments.
Stay on the sidelines. Any bear story will tell you that the best way to deal with a bear on the rampage is to lie down and play dead. Do the same in bear market conditions by staying calm and not making any dramatic moves like selling off all your holdings at one shot. Often in a bear phase, good stocks fall in tandem with bad ones. Wait at least till good stocks can stand again in their fundamentals.
Allocate assets. There’s no point wishing you had less exposure to equity and more in debt when the bears are roaming free. Smart asset allocation and diversification is one of the best ways to ride out a bear phase. In fact, analysts say it’s a good way to recession-proof your portfolio as well.
Go for value. Warren Buffett sees the market’s manic-depressive phases as perfect buying opportunities. When prices are down, you stand a good chance of laying your hands on good companies whose value has been beaten down. Remember to do your homework, however, as not all cheap stocks are bargains.
Get defensive. Exposure to companies in non-cyclical sectors can serve to defend your portfolio when the markets plummet. Defensive stocks historically perform better than the overall market during bad times.
