Though we know that equity market is very volatile, when it actually happens, it does scare the heck out of us.
It gives us a constant tension of when this downturn is going to end.
All these fear will go away if we can understand the advantages of bear market.
"What? Bear market has advantages?" - This episode will explain those advantages.
Hi. My name is Vijay Mohan. You are watching "Investment Insights".
What is Bear market?
When the stock market index goes below 20% from its peak, we call that as bear market.
US stock market index S&P500 has gone down more than 20% from its peak after the release of inflation data last month.
So technically, we are in bear market now.
This might come out as shocking for new investors. We do know that this could happen.
On average, stock market can decline more than 20% once in 4 years.
Can decline more than 30% once in 10 years.
Can decline more than 40% once in 20 years.
We have already reviewed this in detail in "Risks in Index fund investing" episode.
What does that mean? When we are investing for long term, there is no way to escape from a bear market like these.
It will definitely happen and we do have to handle it.
Though we have theoretical knowledge on this, when it happens in reality, it is difficult for us to handle it.
We have had 8 bear markets in US in the past 50 years.
On average, index has gone down by 33% during these bear markets.
On average, bear market has lasted for one year.
The shortest bear market happened in 2020.
Market touched the bottom and started recovering in just 33 days.
It is very depressing to see all these negatives right? When we look at just the bear market data, it appears like that.
Let us see this bear market data along with bull market data.
This chart was created by Invesco group. 4 years old chart. So 2020 bear market is not here.
But still, this chart can help us to understand historical data.
The red dips we see here, they are all bear market.
The green mountains we see here, they are all bull market.
We can see how small bear market is when compared to the size of bull market.
When the bear market lasts for 1 year on average, bull market lasts for 5 years.
Also, when the bear market drops 33% on average, bull market gains 160% on average.
All these are historical data. How are we looking Today?
S&P500 Index has come down by 20% from its peak in the last 6 months.
When the market can go down by 33% on average in a bear market, 20% is not significant. We should not get nervous for this.
Also when a bear market can last for 1 year on average, we have crossed just 6 months.
Anything could happen in next 6 months. We should be ready to handle that.
If the bear market is going to last for another 6 months and if it is going to drop till 33%, then can't we sell everything and sit outside?
Why should we stay invested? - You might think.
If it is that easy, we all would be sitting rich.
But it is average data. Minimum 33 days and Maximum 630 days.
Bear market could last any day between those two based on historical data. We cannot predict that.
That is why we always say that stay invested as we cannot predict the market.
So what should we do in this current bear market? How can we take advantage of it?
If we see some calculations around it, we can easily understand that.
Let's say that we have already invested Rs. 2 Lakhs.
Index price at that time is Rs. 100.
We are investing Rs. 20,000 as new investment every month.
We are expecting a growth of 10% every year. That means, a growth of 0.8% every month.
By the end of 2 years, price of the index would be at Rs. 122.
Portfolio's value would have reached Rs. 7,77,000.
CAGR (Compounded Annual Growth Rate) for this situation is 10.4%.
Let's call this as Situation 1.
To give a fixed return of 0.8% every month, this is not fixed deposit. It is Share Market.
Price would be volatile jumping up and down. It will not be fixed like this.
Let's say that out of the 2 years we invested, first year we ran into a bear market.
In the first 6 months, market is going down by 20% little by little every month.
That means, index price would have reached Rs. 80 by the end of 6th month.
Let's say that index price stays in that Rs. 80 range for another 6 months.
Even during this turbulent times, we are continuing to invest Rs. 20,000 every month.
Market starts recovering from next year. It jumps 5% in the first month.
For the next 11 months, it is rising 3.5% every month.
By the end of 2 years, index price reaches the same Rs. 122 that happened in Situation 1.
This is situation 2.
What is the CAGR now? Same 10.4%.
If we have not invested any amount during these 2 years, the balance would have been same for both the situations.
But we have invested Rs. 20,000 every month. What does that imply?
We have bought the index for cheap during the first year when the market was down.
When the market recovered in second year, out profit is higher than in situation 1.
By the end of 2 years, our balance would be at Rs. 8,90,000.
This is 14% higher than the situation 1.
So in this 2 years investment journey, only because we had a bear market, our final amount is 14% higher.
Can we be fearful of a bear market that is helping us to grow more like this?
Shouldn't we welcome it by giving a bear hug?
One year of bear market, recovery in another year, are all just examples that I am using now.
But in reality, a bear market could last longer and recovery could be longer as well.
The longer the bear market and its recovery, it is advantageous for folks who are earning and investing every month.
Because we are getting a chance to buy the index cheaper for long time.
It helps to boost our growth when the market recovers.
What else can we do based on this?
When we know that we are in a bear market, we could reduce our unnecessary expenses and try to increase our investments.
We can cut down on entertainment and vacation expenses to invest more.
We get opportunities like this only once in 5 years on average.
Next asset allocation. If you have a 60% allocation to equity in your portfolio, then it would have down along with the market as well.
During times like this, we can switch from conservative assets like gold and bonds to equity.
We can try to bring back our allocation % back to 60%.
This is what we call as "Rebalancing".
We can rebalancing like this once or twice a year.
Aggressive investors can do few other things as well.
Smallcaps and high growth stocks would have got beaten heavily during times like this.
If you would like to have those exposure in your portfolio, this is a good time to add those.
I believe that this episode would have helped you to get rid of the fear you have about bear market.
But if you are still scared, then equity market is not the right place for you.
It would be better if you choose other assets for your investment purpose.
We will soon meet again in another episode. Thank You.