King San Josè-Santos, RFP,CFC,LFA,CTA | May 29, 2022
A bear market is when assets go lower around 20% or higher from recent highs. A situation that most of my clients don't want to experience. However, during this uncertain time, it is best to use logic vs. emotions.
Understanding market cycle:
According to Elliot's wave theory ( A technical study where market cycles are explained in waves), there are 5 waves of the market going up and 3 waves for a correction. During the 3 wave cycle, it is mostly a bear market where people try to react to a certain macroeconomic issue or situation which disrupts business.
The word "bear market" strikes fear for short-term traders as high volatility and short-term depreciation of asset class affect their performance. However, we need to understand the difference between a trader and an investor.
Traders vs. Investors
Understanding your objectives should be established before entering the market as 2 psyche offers different market strategies, outlooks, systems, and objectives.
Traders mostly focus on short-term time periods. Taking advantage of the swings of the market. Most traders rely on technical market analysis ( psychology of the market) with minimal fundamental analysis as they believe that fundamentals are slow to respond in day to day market movement while Investors, like any type of business investment, focuses on the long term and success of the company basing it on fundamental factors such as financial statements, financial performance, and ratios with a few technicals.
Why do Investors always win in the long term?
Not only it is less stressful, but most investors also focus on the big swings in the market which traders sometimes miss out on. In regards to operational costs, they pay less commission to brokers and taxes. Famous long-term investors are Warren Buffet and Benjamin Graham.
Is the bear market forever?
The bear market has a threshold of around 20% however sometimes it goes deeper. However, there are long-term investors who are on the lookout for bargains mostly at the end of the bear market cycle.
Bear markets last mostly around 3 to 5 years depending on how the market can correct the issue that triggers the cycle which signals a strong reversal and returning to the 5-wave Bull market cycle.
How to Invest during a bear Market Cycle?
Cost Averaging is your friend
Most clients think that adding up to a losing position is bad or your broker is just getting more money from you. This is one misconception of clients. Cost average helps you lower the cost by acquiring more when the asset class goes lower which increases your position and decreases your "cost". Rule. You buy the same amount within the period of time which allows you to buy more market is low and buy less when the market is high.
Example A. In this example: Mr. XYZ bought 10 Shares of ABC company at $35.
Instead of waiting for the market cycle to turn around as he expects the market will return back to bull, he decided to do a dollar-cost average, he then bought 30 shares at $5, 15 shares at $20, 20 shares at $15 and 12 shares at $25.
So, let us compute the math
($25 X 10 Shares = $350) +( $5 X 35 shares = $175)+ ($20 X 15 shares=$300)+ ($15X 20 shares= $300) + ($25 X12=300 = $ 1425 with 100 shares and average cost PER shares around $14.25.
Vs.
Compare to 1-time payment of
$1425 at $35 per share= around 40 shares
See the difference? If you don't cost average, you get a higher amount with fewer shares. This strategy is best especially if you are investing in a VUL ( Peso global equity fund, Global technology fund, Dollar opportunity fund), once the bear market is finished, you are at the forefront of recovery compared to people not taking advantage of the bear market cycle.
2. Diversify your holdings
During a bear market, it is important to diversify your positions in different asset classes. While waiting for the bear market cycle to finish, it is best to invest in funds that give you dividends.
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3. Focus on the Long-Term Goal
My final advice to my clients is simply to relax and focus on their long-term goals. It may take or may add additional time from your goal however, investing in funds helps you lessen the burden of doing rebalancing most often. Fund managers are always on the lookout. They help you take care of your fund by doing market research, computation, and analysis.
Market cycles like bull and bear markets are part of the investment market cycle. From the Asian financial crisis to the 9-11 market crash to the Lehman brothers era, as a previous US stock trader myself, I've seen all markets, from bull where the market goes up and bear when the market goes down, but what I am assured of is that as long as it is not the end of the world, humans tend to correct their mistakes and markets tends to go higher in the long run.
Again, I emphasize taking out your emotions and seeing the market logically.
Take advantage of the discounts, and start building your portfolio as early as now. As we say in retail shopping stores, take advantage of the 3 years' shopping sales.
About the author:
Mr. King San Josè Santos, RFP,CFC, LFA,CTA
A well respected, multiple licensed, and internationally Certified Financial Consultant and Wealth Manager with multiple clients and corporations under management.
Registered Financial Planner
Certified Financial Consultant for Finance and Investment, US-Canada
Certified Technical Market analyst, USA
Certified Real Estate Market Analyst
Licensed in Traditional Insurance, VUL Investment, Healthcare, and Non-life Protection
You may contact him at
Insularlife@sanjoseandpartners.com | (02) 8790.4111 | www.sanjoseandpartners.com
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