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?
Now I am about 30. Not very old though. But ofcourse wiser than what I was several years back. 🙂
So do I change my stance now?
No.
I still pray for a long bear market. Not a very long one though.
At 30, I still have a few decade’s worth of investing left in front of me. So since I will be a net buyer of stocks over the next decade (at least), I will be happier to see falling prices. Even if markets remained where they are for the next 10 years, it would still work for me. Ofcourse it will be tough to digest a stagnant (or falling) period of multiple years as our tolerance for loss is not what we think it is. But still, it is what should work for me.
Anyway, I don’t need that money for the next 10 years. So lower prices allow me to buy more for the 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 the market which will continue to fall by an average of 5% every year for 10 years (assume hypothetically for the sake of discussion). So with every passing year, a lac of rupees helps me buy more shares (units in this case). Once the 10-year bear market is over, I have accumulated some units.
Now for the next 10 years, I won’t invest anything and it’s a bull market – which grows at an average of +12% every year.
The result is that my Rs 10 lac investment becomes Rs 25 lac (calculations later).
Now let’s reverse the turn of events.
Case 2:
We have a bull market for the first 10 years (+12% growth). This is followed by a bear market for the next 10 years (-5% fall each year).
The result is that my Rs 10 lac investment (a lac each in the first 10 years) ends up being just Rs 10.5 lacs (after 20 years)!
Here is the simple maths behind this:
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 D-day.
I did a case study about this here – Retiring in Bull Market Vs Retiring in Bear Market.
You need to de-risk your retirement corpus from market volatility. You don’t want to postpone your retirement because of a bull or a bear market. Though you might definitely want to prepone it and retire early.
Isn’t 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:
It’s pretty similar to the first case.
Now of course this a very theoretical exercise. The real markets are very 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 that if you are young and can continue investing for many years to come, then a falling market in the 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 read them. It’s important to understand why (at least mathematically) it makes sense to have bearish markets when you are young and in the accumulation phase of your retirement planning.
Now let’s see what Warren Buffett has to say about this. The below extract is from the 1997 Letter to Berkshire’s Shareholders:
I am not Buffett (nor do I aim to be like him). 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 a much better than a bear market later on (when you need the money).
It is that simple.
Ofcourse it’s 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 has been 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 an optimist about the future. And I am one.
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 the 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.