Investing during bear markets: Why a stock market downturn isn’t the end

A market downturn creates a gloom and doom picture in the minds of most investors. In advising high-net-worth and ultra-high-net-worth individuals, one finds that they don’t conduct enough analysis to identify where the real investment opportunities lie but react impulsively—when they perceive their capital is quickly losing value, they frantically diversify by “selling” and “getting out” at the market’s bottom. However, wealth management companies catering to this segment in India, in my strong belief, should focus on explaining why a bear market is not the worst event for investors and help them view it from a different perspective.

Current Situation in Indian Stock Market

Indian stock markets have been up and down lately, and the global economic uncertainties, geopolitical frictions, and inflationary pressures have added to the volatility. In 2024, Nifty 50 and Sensex corrected over 10% from their peak, which left many investors worried. With this correction in sentiment, people trying to adapt to market reality have also made a clear distinction between gold and value, while undoubtedly finding stocks at discounts.

While all consumer goods and technology have seen much higher prices, the longer resilience themes seem to be renewable energy and infrastructure given the government’s focus on actions such as the Green Energy Corridor and Make in India.

Effect on Investors’ Lives

Market downturns not only impact the value of portfolios but also affect the broader financial planning of HNIs and UNHIs. They can lead to unrealized losses at inopportune moments, creating a sense of unease that may alter decisions related to philanthropy, luxury spending, or even the operations of family offices. However, the real impact lies in the loss of opportunity as fear clouds rational decision-making.

Some investors may choose to stay away from stocks for an extended period, opting instead for cash or fixed-income securities. While this may offer short-term comfort, history shows that the long-term cost is often the missed opportunities. The Indian stock market has consistently rebounded after downturns, rewarding those who remained invested during tough times or increased their exposure during market slumps.

Why Bear Markets are Opportunities

• Valuation Discounts: Many fundamentally strong companies are available at fair valuations during bear markets, and there is an enormous opportunity for acquiring such scripts at bargain prices, delivering great long-term returns.
• Dividend Yields: Companies with strong cash flows and a history of paying dividends often see their dividend yields decline during recessions, making them a less dependable source of income.
• Rebalancing Potential: A good way to reassess and realign one’s portfolio is definitely to identify the excess exposure to companies that have delivered a weak performance or are overvalued. Weeding out such companies could create a scope for high opportunities for growth.
• Economic Recovery Correlation: If we take bear markets as an inevitable historical event, we can still count on every one of them preceding periods of economic recovery. They would give an investor the opportunity to actually invest in such times and make full use of the time when all businesses and economies return to life.

Navigating Strategies in Bear Markets

1. Focus on Fundamentals: You need to rate businesses based on their financial health, growth potential, and business sector. Renewable energy, healthcare, and technology sectors are the right sectors to watch for growth in the long run.

2. Diversification: Spread your investments into different asset classes, sectors, and geographies for risk reduction.

3. Systematic Investment Plans (SIPs): Continue or start SIPs to benefit from rupee cost averaging, which would average down the purchase price during volatile phases.

4. Stay Invested: Avoid getting tempted toward selling assets due to panic. But be aware of the long-run view and seek guidance from an expert to manage the uncertain period.

Looking Ahead

India’s economic resilience is based on a domestic market supported by the government’s reforms and is a beacon of hope. These tough times are not an end but a pause from the 8% to 10% growth story. This period is going to be good for HNIs and UHNIs as experts help them put their savings to use in disciplined investment practices.

In sum, bear markets test patience but pay off conviction. Using forward views and understanding the potential in adversity lets investors turn challenges into staircases to financial success. As per the famous saying, “Be fearful when others are greedy and greedy when they are fearful”-it is the ultimate mantra that all but holds good, especially in a bear market.

(The author is Founder and CEO of Mehta Wealth)

Disclaimer: The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.