How To Prepare For A Bear Market In 2021

This article originated from my blog: Investing Beanstock

Join My Tele Channel Here For Updates!

Will we see a correction soon?

The stock market right now is truly disconnected with the current economy right now. While stocks are hitting all time highs thanks to stimulus news, Biden’s presidency and meme stocks crushing hedge funds, unemployment continues to be sky high while Covid cases continues to surge even as vaccines are being distributed.

If the spread gets too serious, many countries may revert to lockdowns again and we all know what will happen to the stock market. While it is true that vaccines are rolling out soon, mass adoption won’t happen until we are way into 2021.

Modified Buffett Indicator: Yellow Line: Stock Market’s Valuation VS Green Line: Current GDP Valuation (OVERVALUED)

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

-Sir John Templeton

At which stage are we at? I personally feel that we are already in the middle of a stock market euphoria and in case a major market correction is on its way, the question here is:

How to prepare for a bear market?

The first thing to do is to not panic and believe whatever you read on the news. News report the DAILY progression of the market and it shows an extremely short-term and narrow viewpoint. They portray market crashes as frightening and how investors are losing millions of money which results in a situation where non-investors believe that investing is dangerous and a scam. While investing can be dangerous if you don’t know what you are doing, investing with a disciplined and patient approach is a time-tested strategy to grow wealth and something I can attest to myself.

It is part of human nature to get emotional especially when it comes to money, that is why it is so difficult to remain rational when the market plunges. If everyone can control their emotions during a crash, then everyone would be rich and markets theoretically won’t even crash because you need a huge amount of selling pressure (more sellers than buyers) for the market to crash.

Instead of panic, do these things instead:

1. Take a look at your portfolio and see if you need to do some rebalancing

2. Adopt a long-term mindset and be clear of your goals for investing

3. Stay focused and refrain from overexposing to low-quality speculation stocks

4. Get ready your ‘Market Crash Sale’ Shopping list

Rebalancing time?

While I generally do not recommend bonds because in Singapore’s context, our CPF already act as a bond (albeit controlled by the government) which allows us to hedge our retirement funds against inflation, if you are new to the stock market and finds that bonds allow you to sleep soundly at night as you are able to cushion against a market downturn, you can go for some bonds exposure but not too much.(though not recommended in this low-interest rate environment).

If you are holding 100% growth counters, then beware because in a market downturn, growth stocks tend to fall much more than their value counterparts due to their sky high valuations.

Long Term, not Short Term

While it can be extremely difficult to filter out all the market noises in the market especially with hype stocks/assets such as Gamestop, AMC, Doge coin achieving 400%-800% returns in a relatively short amount of time, these stocks rely on momentum to drive growth as traders and option buyers continue to pump up the stock prices and in the case of heavily shorted stocks such as GME and AMC, they are forcing a short squeeze on the hedge funds.

I personally own Tesla and even though it is hyped up, I am intending to hold Tesla for the long term. I will not go into the details but Tesla is not just an auto company but a technology company as they don’t just sell cars, but also software, Artificial Intelligence and more.

After filtering out all the short term noises, stick to your own game plan and check how long more you have before your goal (eg. Retirement/Attain a 500k portfolio etc.)

Don’t Overexpose to Speculation

I personally allocate at most 10% of my capital for speculative investments (which are money I am willing to lose) to earn higher returns but of course it comes with risks.

Many people are trying so hard to find the “next Tesla” or “next Gamestop” that they throw their entire savings into penny stocks thinking it will go from $1 to $100. What one must understand is stocks go up for a reason and the reason it goes up should be due to fundamentals.

As I’ve mentioned many times before, the stock market is a voting machine in the short run but in the long run the stock market is a weighing machine. If the fundamentals are bad, how can you expect the stock to grow consistently year after year?

So if you do want to speculate and FOMO pump into stocks like GME, AMC or BB, think twice, how long more till the momentum dies down and the stock plunges back to its intrinsic value? Do not go all in into hyped up stocks of the month because institutional investors (hedge funds/investment banks etc.) will be gobbling up all the profits and send out analyst target to short the stock, which is when retail dumb money panics and lose all their capital.

Is your shopping cart ready?

Just like how you will scroll through your Shopee /Lazada/Zalora and adding all your items into the shopping cart before checking out, do the same for your stocks! While the market is extremely optimistic and greedy, take the time to look into stocks you really want to invest into but valuations are way too high and out of reach. Once the market plunges, that is your time to buy in at a discount and hold it for the long term.

I have already prepared my own watchlist of stocks to buy if the market were to crash and I wrote an article previously here about 5 stocks on my watchlist here.

1 thing I really regret during the March crash was not preparing a proper watchlist and when the entire market was red, I have difficulty choosing which one to pump into because everything back then was “cheap.” So before the next crash, I will do all my due diligence and when the time finally comes, I can calmly execute my plan and buy into the dip.

Conclusion

During a bull market, every Tom, Dick and Harry will look like an investment guru showing off their 200% returns saying how they bet big on GME and got rewarded, but when times get tough and the market goes south, self-doubt, confusion and fear starts to kick in and where do these “gurus” go?

Investing is a long term game and not a short term one. If you are looking for cheap thrills or want to make a quick buck, 4D/TOTO or Poker will be a better bet, or go to the casino. The stock market is not a place for you to get rich quick and even if you do get rich quick in the market because you YOLO into some speculative bets, you will lose that same amount of money just as quickly because of greed and the lack of a proper financial thermostat to manage large amounts of money.

It’s the same logic as a person who struck a $1 Million jackpot, he will most likely buy a car, spend it all on a luxury travel package, go to high end restaurants and buy things he could not afford. Within a year or two, the 1 Million will be close to nothing or nothing at all because the person does not have the capabilities to manage a million so he loses it just as fast as he gains it.

Follow steps outlined in this article and you will likely weather the market downturn. Stay the course and ignore the day-to-day noises that will just serve to cloud your better judgment and turn you into an emotional freak. This is also my self-reminder and to always stay long term.

Understand that with a good plan in place, a market correction or downturn is more of an opportunity than a risk. However, with that said, don’t spend all your time on the side-line praying for the next major market downturn to deploy your capital, do your homework because opportunities are everywhere! It’s just how hard you have to look before you find one.

Thank you for reading! If you find the article helpful, do remember to share it with your friends and family, I would greatly appreciate it! Also, if you enjoy posts like this, do consider joining the Investing Beanstock Telegram Channel (link above) for regular updates, market insights and more!