Financial markets, particularly Wall Street, have been having a rocky start to 2022. Its main indexes, the Dow Jones, the S&P 500 and the NASDAQ have been having a bloodbath in 2022 due to investors speculation and concern of the United States’ Federal Reserve increasing interest rates.
Why is this important enough to force a sell-off in wall street you may ask? This is because when interest rates are increased, safer investment alternatives like bonds or treasury bills now deliver better returns and investors would rather a safe investment alternative that delivers better returns than a risky alternative that depends on the assets perceived performance and demand.
This has also affected the cryptocurrency market. Asides from the fact that there is a history of correlation between the United States’ equities market and the cryptocurrency market, there has been a lack of funding presence in the space since the start of the year, to add to the hawkish federal reserve stance on interest rate hikes.
Today, asides from the oil and precious metal market, major markets across the world and the cryptocurrency space are experiencing a sell-off. The Dow Jones is down 6.6%, S&P 500 is down 9.22%, the NASDAQ is down 14.73%, the cryptocurrency market capitalization is down 25.61%, The FTSE 100 is down 1.20%, the NIKKEI 225 is down 7.41%.
With these markets down, there has been a concern about the best portfolio strategy to adopt in a bear market. Although there is not one absolute strategy, the strategy that would work best for an investor will grossly depend on the investor’s current exposure, risk appetite and time horizon. Here are a few strategies investors can adopt during a bear market.
Dollar Cost Averaging
In a bear market, one of the best ways to deliver value to your portfolio is to apply the Dollar Cost Averaging (DCA) method. Dollar-cost averaging (DCA) is a good portfolio strategy because it divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals. This is one of the best approaches in a bear market, especially for investors with long term investment horizon (10 years and above). This method, when applied in a bear market see an investor mop up any given asset class as the price is going southward. It then gives the total investment entry price an aggregated price that keeps on decreasing on each purchase.
Diversification
This is another good portfolio strategy. In every bear market, some market segments get hit harder than others. Having a percentage of your portfolio spread among stocks, bonds, cash, and alternative assets is the core of diversification. How you slice up your portfolio depends on your risk tolerance, time horizon, goals, etc. Every investor’s situation is different. This asset allocation strategy will allow you to avoid the potentially negative effects resulting from placing all your eggs in one basket. In a bear market and also depending on your risk appetite, this is one of the best ways to mitigate against potential losses. As we can see today, the oil and commodity markets are bullish which stocks are down. A well-diversified portfolio will see its value still maintained, in the green or insignificantly down.
A flight to safety net investments
This is another portfolio strategy to adopt in a bear market. This involves being entirely invested in what I like to call ‘safety net investments’. These are investments that have significantly less risk with little to no chance of default. They are bonds, treasury bills, commercial papers. In the crypto world assets like these do exist in the form of staking. Investors can stake their stablecoins on centralized and decentralized finance exchanges and earn over time. This preserves your portfolio in terms of volume as you would earn more money overtime but it does not necessarily cover in terms of value especially in situations of high inflation rate.
Defensive strategy
You can choose this strategy if you wish to maintain your position in the market irrespective of the market conditions. In this strategy, you are advised to invest in large corporations having a long operational history and strong balance sheets. This is because stable, large-cap companies are usually less affected by a downturn in the stock market. Therefore, their share prices will be less vulnerable. Companies like Apple, Alphabet, Tesla, Facebook and so on are ones to consider in this strategy. Also, investing in necessity goods providers will also be considered as a defensive portfolio strategy. Irrespective of the market conditions, people still need food and other staples, such as toiletries. These companies may include huge cash at hand for operations and are likely to survive any market downturns.
Experts give opinions on which is best
While there is no one absolutely best approach, here are the views of some experts;
Opeoluwa Dapo-Thomas, an international market analyst gave his thoughts about what he thinks the best portfolio strategy is, “Portfolio strategies can be sort of a hit and miss. Buying and holding historically outperforms active management. What typically investors should do in bear markets is to average down on strong stocks they own. For example – although they rarely do but if by chance Gucci and Louis Vuitton go on sale today, demand will rise.
“That’s the same mindset investors should have in bear markets. Buy more of quality companies you’ve always wanted. In investing, you don’t bet on the horse, you bet on the jockey. If the companies are great, believe in them.
“However, if I must add, investors can deplore asset allocation strategies that align with their horizon, risk appetite and objectives. In periods like this, Cash is King as well as Treasury bills and other Safe assets.”
Olumide Adesina, an analyst at Quantum Economics, gave his own view on what he thought was the best portfolio strategy. He stated, “Focus on the big picture. In the past, markets have bounced back regardless of how deep or how long the downturn was. We have seen bear markets before, but if anyone looks at historical price charts, it can be seen how they have recovered to grow higher than they were previously.
“The disciplined investor will likely avoid common pitfalls and benefit from better times in the future, as long as he or she stays even-keeled and disciplined. In general, the longer you remain invested, the more likely you are to meet your long-term goals.
“Consequently, investing in consistent dividend-paying stocks which are typically strong brands with a long history of operations and strong balance sheets might be a solid idea. A downturn in the stock market usually has less impact on stable, large-cap companies. They are thus less vulnerable to major drawdowns.
“Food providers or Tier 1 banks can fall under these top business brands. People need food, other staples, and financial services regardless of the market conditions. In these companies, there is a lot of cash available for operations and they are likely to survive any market downturns.”
Ajibola Lawal, a DeFi analyst, brought his crypto expertise on what he thinks is the best portfolio strategy in a bear market. He stated, “DeFi Options Vaults, Stablecoin Yield Farming and Building/investing in early-stage Web3 infrastructure projects. Bear markets usually translate to thinner books and collapsed yields and a generally a landscape where taking directional trades becomes fraught with much danger to Capital Preservation.
These 3 approaches represent a way for retail investors to access the opportunities that options offer. Investors deposit in their preferred approach and the premiums are paid out as the return/APY on the vault.”
