Maybe the trick is to play dead, stay invested and wait for the bear to move on.
by Kevin Wong
This article was first published by Smart Investor Magazine at the following link:
2022 Bear Market: A Grizzly Affair – Smart Investor Malaysia
Sometimes, we check our portfolio and we gasp in shock at the horrid performance. The percentages are all in the red, and there seems to be no light at the end of the tunnel.
Young investors who invested into stocks and crypto are left holding the bag, seasoned investors are left shaking in their boots. What can we do to prepare for it?
The Anatomy of the Bear
Before we can figure out what our course of action is, it is prudent to analyze and understand the nature of the problem.
Early 2020 we were greeted with the pandemic. The world went into a halt for two years, where supply dwindled and demand skyrocketed. To alleviate the pain, the US Federal reserve printed trillions of dollars.
Although the initial market reaction was of great fear, the money soon made it into the stock market, and we proceeded to have one of the greatest bull runs in the decade. The ride lasted for about a year, which brings us to the beginning of 2022.
The Ursa Awakens
March 2022 marks one of the darkest days of this year as equities dropped. War broke out in Ukraine following the invasion of the Russian army. The market was concerned with the effect the war will have on supply chain and the availability of commodities.
When the supply of the commodities dwindles, and the demand remains the same, prices skyrockets. Classic economics.
Inflation is the kryptonite of investing (or the economy in general). The CPI numbers is the highest since the 1980s, and it is no wonder it has got everyone running around like headless chickens.
Companies will not be able to keep up with the input costs. Workers will not be able to get a livable wage since prices for basic necessities are soaring. Unchecked, this will create a cycle of hyper inflation that will instantly nuke an economy.
The Feds have been printing money and pumping it into the markets for the past two years. Although the Feds have been parroting that inflation is only transitory, now they have finally changed their tune as the bone chilling inflation numbers become available to the public. Kicking the can down the road has become a non-viable option, and the markets will suffer the consequences.
Although some of the inflation that is present today can be attributed to both the war and the Fed’s actions, one thing is for sure, everything is un-bear-ably expensive now.
Since inflation is sky high currently, and the supply chain is impossible to fix, the Feds have only one option left. To destroy demand by increasing interest rates and reducing the money supply. That or risk runaway inflation.
As interest rates rise and money supply is actively being reduced, cash becomes more expensive, and investors demand more return for their investment, which drives down the value of investments. Complex models are used to determine asset prices, but for us simple investors, understanding this relationship is more than sufficient. In simpler terms, interest rates go up, investment go down.
With the threat of two consecutive quarters of negative GDP growth in the US, it is no wonder the markets are growing restless. The GDPNow real GDP growth, as of writing, is standing at 0.3%, it is probable that it will dip into the negative region once more information is available, which will signal to us that a true recession is here.
But can we time the recession and buy in at the bottom? Unlikely.
Recession comes and goes at its own pace, and the markets might reflect that information a lot earlier than expected. Trying to time the market might have the opposite effect of lowering long term returns, since missing just 10 best days of returns in a year will already cripple your portfolio.
Surviving the Rampage
Knowing all of the above, what can we do about it? Navigating the bear market requires understanding of the risk return profile of our portfolio and our specific goals.
Investing in a portfolio of investments that is fully diversified across all economies and geographical regions and taking on the market risk is still the simplest way one can invest without losing too much sleep, as recommended by John C. Bogle, the founder of Vanguard.
Beating the markets is nice, but trying to time derivative hedging strategies and complex long-short plays in a highly volatile market might not be suitable for the less sophisticated investor, and is a recipe for financial ruin. Beating the market is a tough racket, and almost all professionals will not be able to beat it consistently for a long period of time.
The markets have not failed (yet!), and if one believes in the markets, a monthly dollar cost averaging strategy into a diversified index fund is still the most prudent strategy for investors that can tolerate the volatility. Investors nearing retirement age might want to consult a licensed financial advisor to properly plan for retirement, as the market volatility might not be suitable for a retirement fund.
Some experts have touted that crypto moves with the broader market, and offers no diversification benefit, which is hard to dispute, given the current state of crypto. Both institutional and retail investors have lost boatloads of money from being over leveraged and over invested in crypto as the overall crypto market tanked.
Wave after wave of projects that fail to prepare for the market downturn has left investors holding bags. Terra, Celsius and Voyager, are the 3 biggest names that have imploded into oblivion. Many projects, although not dead yet, have lost 90% or more of their peak values. Even Bitcoin and Ethereum have lost more than 60% of their peak values.
What can crypto investors do to survive the impending winter?
First, this is a lesson for young investors that they should only invest in crypto what they are willing to lose. It may sound harsh, but it needs to be said.
For some, it might be 5% of their portfolio, or maybe even less. One might not get rich quick, but at least they won’t be thrown into a roller coaster ride every time the market sneezes.
Second, investors should stay away from any projects promising unrealistic returns. Celsius, Terra, Voyager and many other projects promising extreme returns have gone belly up. If you’re a fish dead in the water, the bear will not hesitate to feast on you.
Stick to the “blue chips” and call it a day.
There is no sense in panicking in the face of the bear. The myth is that the best investors are dead! (Or forgot they have money invested).
Maybe that is the trick, to play dead, stay invested and wait for the bear to move on.
About the Author
Kevin Wong is the partner of Celebrus Advisory, a bespoke and industry-acclaimed consulting firm for digital assets with focus on regulatory compliance, technical delivery, and project outcomes.