How to Deal with a Stock Market Downtrend?

It may be easy to advise a student scoring 90%+ marks or a sports champion who has already won the district and state-level competitions. However, a wise suggestion is needed when the circumstances are not in your favour. And, that’s the most complicated job!

Similarly, in the stock market, it is easier to mentor a person sitting on huge profits, but difficult to guide a person who is at a loss and aghast at the downward trend. As a stock investor you can analyze a number of parameters before investing or trading like the history of a company, Price-to-Earnings or P/E Ratio, share price, financials, etc. But, one thing you can’t predict is the quantum of uncertainty in a bearish market and its after-effects.

Therefore, what to do? Whether you should hold your positions or book your loss? And how to deal if you are trading intraday? Let’s try to understand.

How to Handle a Bearish Market?

Here are few important ways to deal with a stock market downtrend:

1.Do not Panic:

You know, whenever a bearish trend is seen continuously for some days or weeks, investors start worrying about their portfolio. And when their fear overcomes them, they start selling their stocks, contributing more towards the bear trend.

A very rational argument is that the indices and individual stocks are going down only. Hence, it seems better to lose less money rather than losing more. So, what is wrong with this?

Well, if the script is right, it will climb up when the downtrend fades away, the markets take a u-turn. Remember that famous investors like Warren Buffett and Rakesh Jhunjhunwala never worried about short term downtrends and believed in their own decisions for long-term profits.

2. Do Averaging:

Averaging is also one of the best strategies from a long-term perspective. Just take the example of the March-April 2020 period when indices corrected largely, and the stocks were available on huge discounts.

So, there were two kinds of investors in the market, type 1 got feared with the market crash and exited their positions even in losses, and type 2 averaged down their holdings because they knew that the market again goes up and it will benefit them in the long term.

Of course, this strategy largely depends on how much funds are available with us.

3. Diversification:

Diversification is always the tried and tested strategy which everyone should adopt. An investor must not park all his money in one place. He should distribute among stocks, bonds, REITs, gold, and other asset classes.

As every individual has different needs, a period of investment, goals, risk-taking ability, they must accordingly diversify their portfolio to reduce the risk.

4. Decide the Investment Amount Wisely:

A common mistake that investors make! They put whatever money that they have with them in the stock market in the hope that the market will rise and they will earn more profits.

This greed is not at all healthy and profitable. You should carefully decide what proportion you can invest in the stock market and even afford to lose if things do not go right as per your plan.

Therefore, if the amount is lower or not a large proportion of your savings, then you can probably wait for the markets to rebound and do not sell your holdings because you need money for survival.

5. Look for New Opportunities:

Problems give rise to new opportunities! Thus, the bear market will always provide you good stocks at a lower price.

So, it’s a golden chance to look for undervalued shares and invest in them for the long term. Value investing, as we call it! Here you see and compare all the financials and ratios of a company and find its intrinsic value. If this value is less than the market value of the stock, you buy the stock as it is undervalued price and expect it to appreciate shortly.

6. Defend Your Portfolio:

At the time of an economic crisis, some sectors or companies perform better than the market and indices. So, why not put some money in those stocks?

For example, when Covid-19 hit our economy, the Pharma and the top FMCG companies outperformed other sectors as people didn’t stop consuming FMCG products like soap, shampoo, and toothpaste.

Also, since medicinal requirements were high due to the pandemic, pharma stocks were making new highs despite a downtrend in the overall market.

7. Take Short Positions

It is the beauty of the stock market that you can make money in any trend (whether upward or downward) the condition is your prediction should be correct.

Taking short positions means selling first and buying them later as you predict that the price will go down. It is very risky as there is no guarantee, and prices can also go up. You also require margin accounts for short selling.

8. Set Targets and Stop Loss:

Setting the targets and putting stop losses is very important for successful investing. It helps you to cut down on your emotions and automatically executes the trade whenever it hits the upper or bottom line.

When we manually do this, it gets hard to execute the trades, and we miss the critical price points, which sometimes never come back on the same day/week/year.

Conclusion

To be on the safer side, we believe that a retail investor should invest wisely for the long term as he generally does not have time to manage his portfolio daily.

And as bearish and bullish trends are a part of markets, bearish trends sometimes worry retail investors like us. Therefore, to win over your emotions and temporary losses, we listed some ways.

But again, the decision purely lies upon you, your investment style, risk tolerance, and your circumstances. Analyze your goals and align them with the markets and take the right investment decisions.