Financial market trends, Part 1. Bear market: how to find opportunities in falling markets

Every investor feels that sense of anxiety when markets start to fall. It's like stepping into a deep, cloud-covered valley - the visibility is poor, the path seems unpredictable and the fear can worsen with every step. Pessimism is rife in the media, the news is full of threatening headlines and even experienced investors can feel hesitant. But investing is a long-term journey, with downturns a natural part of the cycle. History has repeatedly shown that these "valleys" do not last forever. The aim of this article is to give you the tools to successfully navigate this valley.

What is a bear market?

A bear market is a condition of financial markets where prices fall over a long period and on a large scale. The term is inspired by the movement of a bear attacking with its paw downwards. The opposite is pulliturg (bull market), where prices are rising, like a bull charging upwards with its horns. Although a bear market is often defined as at least a "bear market". 20%-list decline from the recent peak, it is more a psychological condition where investors' faith and optimism have been replaced by fear.

Bear markets are triggered by a number of factors:

Economic conditions: slowing economic growth, high inflation, rising interest rates.
Political events: wars, trade wars or geopolitical instability.
Unexpected events: such as a global pandemic or a natural disaster.

Psychology of the bear market: fear and irrational decisions

The biggest enemy of the bear market is not the fall itself, but our own emotions. Fear and panic often lead us to make decisions we later regret. One of the most common behaviours is. herd behaviourwhere investors sell shares simply because "everyone else is selling". Such impulsive behaviour often locks in losses and deprives us of a subsequent recovery.

For example, at the beginning of 2022, when global markets started to fall, many investors sold their shares, fearing that the fall would continue. They only looked at the last month's or quarterly returns, forgetting their long-term goals. By keeping their emotions in check and focusing on the long view, it is possible to avoid these common mistakes.

Effective strategies for coping in a bear market

The bear market is not only a threat but also an opportunity. The following strategies will help you succeed during this time.

Focus on the long-term goal. History has clearly shown that markets have always recovered. The S&P 500 index has survived several downturns over the last 100 years, but has always moved upwards over the long term. Think of your investment as a decades-long project, not a short-term speculation.
Diversify your portfolio. Don't put all your eggs in one basket. This principle is particularly important in the bear market. Diversification means investing in different asset classes, such as equities, bonds, real estate or even alternative investments. It is also sensible to diversify investments across different geographical areas and sectors. For example defensive sectors such as utilities, consumer staples and healthcare are often less volatile than technology companies.
Regular and automatic investments (Dollar-Cost Averaging). This is one of the best strategies against a bear market. When you receive your monthly salary, you automatically transfer a fixed amount into an investment account. This strategy removes the emotion from the investment process. When markets fall, you buy more shares for the same amount. When markets rise, you buy less. In the long run, this will help keep your average acquisition cost lower and give you the best result.
Take advantage of low prices. The bear market is a long-term investor's best friend. It's a time when you can buy quality companies at a discount. Don't buy every falling stock, but focus on companies with strong financials, stable businesses and good long-term prospects. It requires careful analysis and discipline, but it pays off.
Keep your portfolio balanced (Rebalancing). Review your portfolio regularly, for example once a year. If your holdings have grown too large, sell some and reinvest it in asset classes that have become smaller. This will help to keep the risk at the desired level and is a good way to lock in some of the gains.

Historical context and examples

History offers many examples of bear markets. The global financial crisis of 2008 or even the market downturn of 2022 were scary, but they are clear examples that markets have always recovered. Those who maintained discipline and continued to invest came out of these periods with stronger portfolios.

For example, who started investing S&P 500 index during the financial crisis of 2008 and continued to do so consistently, now has a significantly larger portfolio than those who withdrew their investments out of fear.

The bear market as an opportunity: practical ideas for your own investments and the risks involved

In addition to the above strategies, navigating the bear market is also a psychological exercise. Think for a moment, what would you buy if your favourite shop displayed the label "-30%"? Chances are, you'd jump at the chance. The exact same thing is happening in the stock market. A downturn is like a big bargain sale, where quality assets are offered at a bargain price.

In addition, new, forward-looking trends are often emerging in bear markets. In times of economic downturn, companies that are able to cope with adversity, that have strong management and that are in a better position than their competitors emerge. This is an ideal time to analyse markets and sectors that show resilience and potential for the next period of growth. For example: The crisis of 2008 saw the rise of a number of e-commerce and technology companies that set the stage for the boom of the next decade. In today's world, these could be, for example, green tech, medical technology or even some unexpected niche sector. These are times that require an informed and curious mind to see beyond the noise.

However, it is important to remember that investing in the bear market is not risk-free. There is a risk that the downturn will last longer than initially anticipated, or that the company you buy will not recover and go bankrupt. It is therefore crucial to do your homework, not to be tempted to buy falling stocks at any price, but to focus on strong fundamentals.

Tagline: bear market is inevitable, fear is optional

The bear market is an inevitable part of the investment journey. Success lies not in avoiding downturns, but in understanding them and reacting to them in the right way. By keeping your emotions in check, sticking to your strategy and taking advantage of the opportunities on offer, you'll be prepared for any market situation. The next time markets fall, don't panic, but see it as an opportunity.

In the next article we will talk about from and how to make the most of rising markets.