Bear market is inevitable. It is part of the cyclical nature of stock trading. Generally a bear market is considered a market condition where prices of securities are falling. The challenge is that it is difficult to decipher when it is coming, how long it will last and how deep it will fall. Market analysts believe that a downturn of 20% on more multiple broad market indices over at least a two-month period is considered an entry into a bear market.
Notwithstanding that a 10% fall may not pose much problem unlike when the market deeps by as much as 50%, the right attitude and a better trading philosophy would be to position to take advantage and benefit from the downturn, after all even in the same bearish situation, stocks may rise within the period. For example, the Nigeria equity market, on Tuesday, March 3, 2020, closed higher halting the downtrend of seven consecutive trading days. The All share Index increased by 438.54 absolute points. Overall market capitalization size gained N231.91 billion representing a growth of 1.70% to close at N13.68 trillion.
Because market is falling, investors anticipate losses and then continue to sell. But some analysts believe that it is better to hold on and adopt good trading strategies. If you sell when the market is down, definitely, you will realize a loss. Therefore, it is advisable to sit and wait for the market to regain because research has shown that the average duration of a bear market is less than one-fifth of the average bull market, while they average gain of a bull market is over 128%. Aside it is better to look at it from the point of being a long-term investor as market dips and drops; it is likely to have smaller effect on the long-term performance of your portfolio compared to investor who sells off during bearish periods.
Aside adopting long-term holding strategy, there are other options that can be used. One of such options is to buy index funds at regular interval. In this way, you can gain when the market re-bounces. An index fund is sort of a mutual fund created to mimic and match or tract the performance of market index such as All Share Index or NSE 30. By investing in an index fund, you own lots of equity/stock. For this option, the right strategy is to invest small amounts at regular interval and not going all-in at any one time.
Another way is to use derivatives. This is a very risky strategy and so, requires experience. You can buy short and long term puts on major indices or sell naked puts. A naked put is when the option writer (the seller) sells a put without owning the underlying asset. The seller benefits if the underlying asset price goes up with an downside risk of being forced to take delivery of underlying asset if the price falls below its strike price and the holder exercises but the put premium cushions the loss. To optimally use this option, it is better to keep selling short-term, especially on solid companies that pay dividend. So it is better to look for such companies when using derivatives option. Vitaform Nigeria Limited, Total Nigeria Plc, 11 Plc (formerly Mobil Oil Nig, though the company is planning to delist), Nestle Nigeria Plc, Dangote Cement Plc, Beta Glass Nigeria Plc, Cap Plc, Glaxosmithkline Consumer Nigeria Plc, Nascon Allied Industries Plc, UBA Plc, Stanbic IBTC Holding Plc, Saplat Petroleum Dev. Company Plc, Unilever Nigeria Plc, United Capital Plc, Zenith Bank Plc, Dangote Sugar Refinery, Okomu Oil Palm Plc and GTB are the top quoted companies that have been paying dividend. Even in a bear market, there will be a period where stock prices rise which will give you profit from the puts. There are stocks or assets or sectors that hold on even when the entire market is down. For instance, alternative assets such as gold and silver in a bear situation even outperform defensive stocks such as food and personal care stocks. Also bonds may have an inverse relationship with stock. At times bond prices may go up as stocks decline. A particular sector may do well than others. So it is left for you to discover the particular sector of the market.
Also, some market operators, analysts and strategists advocate the use of ‘averaging down’ strategy in a bearish situation especially for long-term investors and contrarians. Long-term investors hold the asset and not prone to selling while contrarians go against prevailing trend or contract. These investors see stock decline as being available at a discount to its intrinsic value or fundamental value. Therefore they prefer to use “Averaging down’ strategy, which is all about investing additional amounts on a financial assets or instruments, especially when the instrument has declined significantly in price after the original investment. However, the downside risk using this strategy can be very high, so it is important to analyse and ascertain the risk profile of the stock and select the right stock instead of investing in all stock in your portfolio. In fact it is best for blue-chip stocks, with low risk of corporate bankruptcy and strong fundamentals.