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How To Build A Portfolio That Can Perform In Bear Markets?

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An Investor’s Guide To Preparing For A Gloomy Market

Economies and markets are cyclical in nature. So bull and bear markets are inevitable. In today’s story, we will be talking about creating a portfolio that can last even in a bear market.

In a bull market, most of the investors make money. But how to prepare for a bear market? Most of the times, preparing for a bear market is all about making small tactical moves that help you to maximize the returns and minimize the risks. Let’s look at a few of the right and wrong practices while preparing for a bear market.

Wrong: Portfolio management is all about market timing.

Right: Can you predict a bear market? Well nobody can. It may be waiting just around the corner or maybe after a few years. Smart portfolio management is all about managing risks, not timing market. Preparing for a bear market doesn’t mean you need to jump from equities to cash, where most of the times you’ll miss out on gains that normally comes towards the end of a bull market.

Wrong: You don’t need to rebalance your portfolio when there is a sign of down market.

Right: To prepare for the tougher times, one needs to let go of the riskier stocks that have a high beta and increase exposure to stocks that have relatively low risk. The idea is to keep performing stocks and safer businesses and get rid of high risk and non-performing stocks.

How To Build A Portfolio Than Can Sustain The Bear Market

And anything can trigger it. Global trade war, oil crisis, political instability and terror events like 9/11 etc. However, you can structure your portfolio in a way that is built to sustain the toughest storms.

1. Construct a well-balanced portfolio

A portfolio with only defensive bets can create long term wealth at a lower risk. However, in a bull phase, such stocks may underperform in comparison with the overall market. A bull phase rally is always lead by cyclical and high beta stocks.

So what is the ideal way? The ideal way would be to choose a mix of both aggressive and defensive stocks from multiple sectors based on their fundamentals, business growth potential and management pedigree.

As quoted by Warren Buffet says, “Don’t put all your eggs in one basket.”

2. Understanding market and business cycles

No one knows when a bear market will knock our door. If you understand business and market cycles, you’ll be able to devise a portfolio structure that helps in curbing losses during a bear market.

3. No one size fits all

Perhaps the most important factor, there is no one-size-portfolio that fits all. That’s why you need to invest as per your risk appetite, investment horizon and financial goals. An investor who is willing to take more risks may invest in stocks with high beta. On the other hand, a risk-averse individual will hold more businesses that are non-cyclical (E.g. FMCG) or a dividend stock that pays regular dividends to the investors.

4. Focus on quality

Don’t forget that when you invest in good businesses, your portfolio will not just survive any kind of bear markets but also outperform with time.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

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