Smart strategies to survive a bear market - Sure shot tips

Volatility is the tendency of the equity markets. Therefore, investments in the stock market have a very strong relationship between risk and return. Both bull and bear markets are hard for retail investors to predict and reap returns. Often, retail investors face the brunt when bulls go for a rest. The corrections or downside move or the market's rollercoaster ride leave them in a state of panic. This trepidation is natural. But retail investors should understand that the bear markets are no reason to fear but it is an opportunity to revisit the portfolio and de-risk it with good fundamental stocks.

Ricky Kirpalani, lead sponsor, First Water Capital Fund (AIF), said that one has the flexibility in the stock market to both average existing positions and/or buy into new stocks. That is the beauty of the market where entry and exit points are generally always available and investments can be done in part. 

Rahul Shah, co-head of research, Equitymaster, said that what very few people understand about a bear market is that it has a lot to do with psychology than anything else. And the bad thing about psychology is that unlike economic numbers and corporate profits, psychology is extremely hard to measure and wrap your heads around. 

Therefore, the best strategy in a bear market is not to try and predict the markets but have a perpetual protection against it, h said, adding that protection and not prediction should be the mantra. 

Tips to survive in a Bear Market 

VALUE STOCKS 

Ricky Kirpalani said that when the market corrects, the preference should be at least to have positions in value stocks and not those that have high multiples or momentum plays. Any further fall in market price allows adding to the position at better discounts.

On the idea behind averaging stocks in the fall, he said that there is no science for averaging stocks. "But discipline is important. You must not be intimidated or keep waiting for prices to keep falling. This is situation specific though."

"Ignore the stock market and stay focused on buying and holding on to good quality companies that will continue to create new profit records 5-10 years down the line. The bottomline is one should be clear about the strategy one wants to deploy and stick to it without giving in to fear or anxiety of any kind," Rahul Shah said.

DIVERSIFICATION

Portfolio diversification is very important. But it also depends on the strategy - concentrated or diversified, one should have a reasonably diversified portfolio in both a bull or bear market. "It also depends on one’s risk appetite and experience," Ricky Kirpalani said.

HEDGING 

Another factor that is important to survive in a bear market is hedging. If done properly, he said, hedging can protect you from losses. Derivatives can be used to hedge during corrections, Ricky said, adding that "but this should be reserved for the seasoned investor."

CASH

Another factor that should investors consider is going into cash during a bear market. This is definitely a drastic move. This may be done out of fear and panic of the bear market. Choose stocks based on good fundamentals that will bring you back in the market. It is always wise to have cash available to buy when stocks' prices fall/correct.

Suppose the market is down 10 per cent, then look for the securities that have slumped the most. Giving preference to a sector that is down most could be a good bet as chances will be high for that sector specific stocks to recover first. But it is important to be disciplined when you get into the securities that everyone is selling. Here, buying good stocks and having a long term view is essential.

Rahul Shah said that it is wise to have some cash handy so that you are not forced to sell at the wrong time. "Having cash allows you to take advantage of bargains that emerge on account of the market crash."

STOP LOSS

Stop loss orders may be another solution to protect a portfolio's depreciation. Stop loss is an order that is placed below the current price. If the stock price falls to that price, the scrip is sold automatically.