How to invest in a bear market

I have been buying more stocks the past couple of weeks since the markets have been hammered by the COVID-19 pandemic.

We are definitely in a bear market.

We are likely going to go into a global recession.

There is the likelihood that we will face a recession to a comparable degree as the great depression.

It is likely that the current market crash is only the beginning of a much greater decline and that prices will fall even further.

There is the possibility that markets will make a sudden and sharp reversal and trend to greater heights as the world overcomes the COVID-19 pandemic and governments support the worlds economies.

There is also an equal possibility that markets will fall even further and remain at depressed levels for a long time.

In short: I have no idea what the markets will be doing.

That being said, my educated guess based on what information we have is that:

We are in a bear market. Markets have crashed a lot, but is likely to fall further because:

  1. We have not factored in the true extent of the effect of the COVID-19 pandemic. This will only be truly evident in the months to come as economic data and company earnings reflect it.
  2. Markets have only fallen around 30% from record highs. We were massively overbought in the first place and history indicates that we could go as far as 50%.

Of course, history need not necessarily repeat but our current condition is not much different from how we were about a century ago when the great depression occurred.

Preparing for the worst is also psychologically more prudent than hoping and preparing for the best and being crushed by the worst.

So how should one best invest in this uncertain (but likely bearish and in recession) market?

No idea.

But this is how I am doing it based on the knowledge and information that I have and based on my investment objectives.


*I believe that being absolutely clear about ones life and investment goals is the most important first step in investing and in planning for ones investment. I strongly suggest readers read through my three steps to determining your investment goals outlined in the Holy Grail of Investing Series. Be clear about what really matters to you and the real reason you are in the market; then everything else becomes all the more simple*

Investment goal step 1

Investment goal step 2

Investment goal step 3


STEP 1: Psychology – Look at your investments as MONEY GENERATING ASSETS

I am an income investor. My goal is to build an investment portfolio that can give me a reliable, consistent stream of income.

I look at my stock holdings as one would a rental property. I don’t care so much about what the market is doing to their price, other than that if they are being irrationally undervalued by the market and I can buy more of them at bargain prices, then I would. I wouldn’t panic sell my cash generating machines just because other people are panicking because everyone else is panicking.

As long as the business is intact and is likely to continue providing me with sufficient income, then I wouldn’t sell them.



STEP 2: Psychology – in the long term, markets are likely going to go up

Pandemics come and go. Recessions come and go. In the long run, markets are likely to grow and thus trend upwards along with the growth in the worlds population.

Bear markets and market crashes and recessions are short lived opportunities to buy quality assets at bargain prices.

Have a long term perspective.

STEP 3: Methodology – grab GOOD yielders

I look for good quality companies with businesses that I believe are sustainable that have been paying fairly stable or – better still – growing dividends over many years whose stock prices have been pressed down such that their dividend yields are very attractive.

I look for yields of 4% or more. I have explained my reason for this in the post Top 3 High Yield and Sustainable Dividend Stocks of Bursa Malaysia

In the past 2 weeks with the markets being hammered by the COVID-19, Opec+ breakdown and the political uncertainty in Malaysia, I have been able to find (and grab) quality 7% + yields.



I will be releasing a list of Dividend Growers and my list of Quality 7% + Yielders (most of which I have recently bought and hope to buy more of). If you don’t want to miss out on these stocks, subscribe to our mailing list so that you know when the lists have been released.

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STEP 4: Methodology – buy in tranches

In order to potentially buy more stocks at lower prices should the market fall further, I have been buying in stages, conserving cash to buy more at lower prices.

I use simple technical analysis to determine buying prices, adding more to my position at potential supports.

In certain cases like for big quality names and in high yielders that have an upcoming dividend payment that I want to get a hold of, I add more after a fall of more than 10% from my average price.

Cash in and off itself has no value, but in this uncertain market, having a stash of cash to mobilize and buy quality stocks that can give you a good and consistent income is – in my opinion – a good thing.

Conclusion

A bear market is probably a good opportunity for the more patient, longer term income investor.

It’s also a good opportunity for those looking for growth. Although I mainly look for income, I also have a portion of my portfolio in growth stocks. Many potential fast growers – mostly the tech companies – have been severely pressed down and are potentially good value buys.

The above is how I am taking advantage of the current market crash and bear market. I still have a lot to buy and a bit of dividend coming up that I plan to reinvest into more stocks.

Your personal situation and aims may or may not be similar to mine so my methods may or may not be suitable for you. Overall though, I believe that market downturns are great buying opportunities for longer term investors – if we can overcome the fear and also plan appropriately for the worst case scenarios.



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