What to do in bear markets

The sombre market mood now could hardly be more different from the euphoria around this time last year when the Sensex hit 21,000.

Now that we're in a bear market with portfolios shining red, what should you, as a young investor, be doing?

If you want your portfolio to participate in the next bull market, it will need a thorough overhaul on the following lines.

Take profits in sectors and stocks that featured big gains in the last two years — FMCGs, mid- and small-cap consumer plays.

Sell stocks of companies that have seen their earnings being hit by galloping interest costs.

Those that have looming FCCB redemptions should also go. The lag effect of interest rates may impact their prospects for a few quarters.

Switch from high PE to low PE stocks while avoiding the above risks. Not sure how to do that? Buy into index exchange traded funds, value funds or diversified mutual funds with a good record. That will ensure participation in any rebound.

Here's what you should not do.

Don't jump in with all your surpluses at one go. Set aside a proportion of your savings towards equity investments and don't lose your nerve if markets fall.

The only investment that can help you recoup losses suffered in equities is equity itself. Whether it's a bullish market or a bearish one, it is best to allocate a fixed proportion of your portfolio to equities and balance it with safer investments such as fixed deposits.

If your equity exposure is already past the 70 per cent mark, it is advisable not to go overboard on buying more stocks.

Don't scrounge for penny stocks. Blue-chips may not multiply in a month, but they offer far greater certainty of long-term returns than penny stocks.

Don't wait for the market to ‘bottom out' if you're investing after a market fall. That's a level which is evident only in hindsight. If you are a long-term investor, don't make too fine a point of timing.

When you hear news that the Sensex has broken through a key ‘support', it is addressing traders who want to make a quick buck over a day or a week. Not the retail investor who buys a stock for 5 years.

Shorting

Don't try shorting stocks. Despite all the wise-sounding counsel on television, believe us, no one has a clue on where the markets are headed in the short term.

Predictions about where the Sensex is headed over a trading day are often wrong.

That's why you should never be tempted into ‘shorting' a falling market or stock. The problem with short selling is that the price has to fall immediately for you to make money on the trade.

When you buy a stock and it refuses to move up you can always hold on to it, in the hope that you will be proved right in a month or even a year's time.

However, when you short-sell a stock, you don't have that luxury. To square up the position, you will need to buy the stock at a higher price if need be. Shorting is a sure way to lose your shirt in a whimsical market.

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