How to survive in a bear market

As equity markets operate in cycles, one should accept that bear markets are just a feature and not an exception. So, even as one aspires to make quick gains during the bull phases of the market, one must be prepared for the losses, at least notional during these down periods. They could turn catastrophic if the investors redeem or exit during such times as the losses turn real. These phases could be extremely hard and painful as the drawdowns could be sharp and quick evaporating valuations in a jiffy.

But these cycles would allow investors to also make outsized returns if invested at the trough or even continued to stay invested. Timing of the market is if not impossible is very difficult and it's futile to do it nor anyone can succeed consistently. The biggest antidote for timing the market is timing spent in the market.

Of course, our minds play roulette sand and make us repent if we had acted or not. We seem to assume that we'd envisaged such a situation as hindsight bias kicks in. The justification of our actions or not would dominate our thoughts as we try to come to terms with the unfolding situation. These times turn overwhelming and could inflict an adverse impact on our psyche.

Also, during bear markets we tend to shrink our timelines due to increased fear. As further economic unpleasant news arrives, we tend to correlate it with the performance of the markets and act haste. The historical data is, however, contrary to this belief. Emotions hamper our way to think straight and this influences our decision making in these stressed times.

The human mind's capacity to extrapolate a situation never seizes and this produces repercussions which are not favorable, almost always. During a bull phase, investors tend to take any/every information to bolster their thesis while the vice versa happens during the downturn. We're bombarded with unpleasant economic news which further feeds into our negative psyche exaggerating our fears.

Certainly, some of the losses during these times could turn permanent and is hard to recover. Hence, is a difficult period to remain invested in the markets. This only compounds our emotions leading us to make wrong choices. This would put a litmus test on our emotions and actions during these stressful times.

This time it's different might sound clichéd but every bear market is different from the rest. Though we've heard this multiple times, we tend to draw patterns into the future that reflects the past. So, the randomness of these events is discounted making it difficult to make any new patterns. The outcome of any bear market is purely dependent upon how the portfolio is manned during these downturns, which solely portrays more about the person than that of the portfolio.

While it's easy for a trader to decide about the exposure to the market, it's very difficult for an investor to remain invested all through this period. The drawdown questions the conviction of the long-term investor on how to handle such a situation. Should one retain the status quo or change the allocation would be purely a proportion of the individual risk appetite. It's important for the investor to cut the rigorous noise to contain the urge to act during such periods. These are some of the ways to counter the exacting periods and enjoy long-term investing success.

(The author is a co-founder of 'Wealocity', a wealth management firm and could be reached at [email protected])