How to Navigate the New Born Global Bear Market

By Mark Betram [Public domain], via Wikimedia Commons

An index of global stocks closed the day more than 20 per cent below its record high last May, satisfying the definition of a global bear market

The first question you need to ask is what’s your investment universe and how are the fundamentals holding up versus the stock market’s sentiment.

For example, I invest primarily in stocks in the S&P 500. Even though “Foreign sales accounted for 33% of aggregate revenue for the S&P 500“, it’s safe to say that of the 3 major economies in the world, USA is actually doing surprisingly good versus Europe or China. And one thing to note is the US economy is very self sufficient, with only 13% of US GDP export based and <8% exports shipped to China.

In other words, I’m not very worried since the underlying environment that my stocks perform is doing not bad.

If you were invested in China or Europe… then I would start worrying and would dig deep on how the underlying economy’s weakness would potentially affect the fundamentals of your stocks.

The second question you need to ask is where is the stock market in relation to historical valuation and market sentiment.

I covered very extensively before how you can hedge or leverage based on historical stock market valuation and market sentiment using the Samuelson Share, but I never explained why this is important.

The reason why this is important is because timing + price paid determines return.

It’s why in the book “Margin of Safety”, Seth Klarman talks about the danger of investing too soon into a bear market.

Sure, you can lock in a very certain return at a certain price if you do your analysis correct, but why be in such a hurry to lock in a very certain rate when it’s very likely you can get a better bargain very soon?

Even if you’re not risking permanent capital loss, it’s prudent to always be aware that it’s far harder percentage wise to gain than to lose (50% loss requires 100% return to break-even).

Many times, the opportunity cost of investing immediately is far higher than holding cash in times of a fresh bear market.

The third question you need to ask is how much of your portfolio is already in stocks.

If it’s mostly in cash already before the bear market began, that’s great news. I suggest dollar cost averaging the total amount of cash you intend to invest in the stock market over 18 months (assuming the cash makes up 30+% of your portfolio when you start deploying cash).

What you’re trying to achieve is take advantage of increasingly lower prices without prematurely running out of dry powder.

And the act of gradually entering the bear market is important because if you don’t possess the ability to forecast the bottom of a bear market like me, gradually entering the bear market means that you would have a high or maximum exposure at the bottom (Thanks to Whitney Tilson’s sharing for that insight).

If it’s mostly in stocks already before the bear market began, ask yourself whether the existing stocks you own were bought at a price that already has a very certain excellent / good return locked in.

If the price bought already locks in a very certain excellent return, sit tight and hold on.

If the price bought already locks in a very certain good return, check to see if you’ve made a profit or not.

  • If you’ve made a profit, sell
  • If you’ve made a loss but you are unable to find investments with much better prospects during the bear market, hold
  • If you’ve made a loss but are able to find investments with much better prospects during the bear market, sell

With the amount of cash you’ve raised from liquidating existing positions combined with any extra cash you already hold or plan to add upon through income streams or debt, gradually move back into the stock market over 12 months as mentioned earlier.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

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