Why I Pray For A Long Bear Market?

Everybody loves a bull market. Stocks are rising and so are people’s portfolios. So why is it that I pray for a bear market?

 

I remember a reader was annoyed with me, for publicly saying that I would love to see markets crash. I did answer him but that was more than 3 years ago.

I thought I will revisit the topic again as then, I was in late 20s.

Now I am 30. Not very old though. But ofcourse wiser than what I was 3 years back. 🙂

So do I change my stance now?

No.

I still pray for a long bear market. Not very long though.

At 30, I have few decades worth of investing left in front of me. So since I will be a net buyer of stocks over the next decade (atleast), I will be happier to see falling prices. Even if markets remained where they are for next 10 years, it would work for me.

I anyways don’t need that money for next 10 years. Lower prices allow me to buy more for same amount being invested. When markets rise later, I will benefit from having bought more shares.

Think of it like this:

Case 1:

You invest Rs 1 lac every year in market that will continue to fall by an average 5% every year for 10 years. So with every passing year, a lac of rupees helps me buy more shares (units in this case). Once 10-year bear market is over, I have accumulated some units.

Now for next 10 years, I don’t invest anything and its a bull market – which grows at an average of +12% every year.

Result is that my Rs 10 lac investment becomes Rs 25 lac (calculations later).

Now lets reverse the turn of events.

Case 2:

We have a bull market for first 10 years (+12% growth). This is followed by bear market for next 10 years (-5% fall each year).

Result is that my Rs 10 lac investment (a lac each in first 10 year) ends up being just Rs 10.5 lacs (after 20 years)!

Here is the maths behind this:

Investing Bear Bull Market 10 Years
Investing Bear Bull 20 Years Graph

So being young and having a decade or two before me, which scenario is preferable?

Ofcourse the first one. Atleast for me.

But if you are nearing retirement, then you don’t want a near-term bear market. Because you don’t have the benefit of time on your side. Also, if that’s the case, you should be looking at reducing your exposure to equity markets as you near the D-day.

You need to de-risk your retirement corpus from market volatilities. You don’t want to postpone your retirement because of a bull or a bear market. Though you might definitely want to prepone it. 🙂

Now, I am sure you would be interested in knowing what would happen if we continued investing a lac every year even after the 10th year? That is, from Year 11 to Year 20.

Here is the result:

Investing Bear Bull Market 20 Years

Its similar to first case.

Now ofcourse this a very theoretical exercise. Real markets are different and don’t go up or down in straight lines. I can even use figures that are more suitable to prove my case. 🙂

But that will defeat the purpose.

I am only trying to say is that if you are young and can continue investing for many years to come, then a falling market in near-term will do a lot more good for you in long-term, than a rising one.

Note – If you have ignored reading the tables above, I suggest you do read it. Its important to understand why (atleast mathematically) it makes sense to have bearish markets when you are young.

Now lets see what Warren Buffett has to say about this. Below extract is from the 1997 Letter to Berkshire’s Shareholders:

Berkshire Buffett Letter 1997

I am not Buffett (nor do I am aim to be). But atleast you can have faith in what Warren Buffett says. Isn’t it? 🙂

Bull markets make you happy because the notional value of your investments goes up. But it’s the bear markets that can make you wealthy in long term as you get to buy at low prices.

A bear market today is much better option than a bear market later on (when you need the money).

It is that simple.

Ofcourse its easier said than done. A 10-year bear market can shake the faith of even hard-core investors. I am not saying that I can and will continue to stay invested 100% in a market, that is falling for years. But I will not be completely out of the markets too – knowing very well about the general nature of stock markets. Investing by definition means being optimist about the future.

I will make sure (or atleast try) to keep a part of my investments in markets. I might diversify across safer assets. But that doesn’t mean that I will be ‘all-in’ in debt.

So think about it…

If you are young, a bear market presents a golden opportunity to make some serious money in long-term.

But a very important point to understand here is that when you invest in stocks, a lot depends on how soon you need the money. If you need money within 5 years, ideally you should not be in markets. You don’t want to end up with a bear market when you need the money. That will be pretty bad and frankly, nobody knows how long a bear market will last. Only invest that money in equities, which you need after 5+ years.

Advertisements

Written by Dev Ashish

Founder - Stable Investor Investing | Personal Finance | Financial Planning | Common Sense

6 comments

  1. I made a Portfolio through lump sum investment in Mutual Fund and PE value of my portfolio is 19 but the PE value of Nifty is more than 28. Sir what is my expected return in next 3 to 5 years

Leave a Reply