27 January 2023

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Bear market: because they always 'deceive' investors

Luigi Campopiano

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In the past year, we have witnessed a sharp decline in all the main stock exchanges, especially the ones in America with very strong weekly or daily rebounds. This is completely normal in bear-ish phases.

The figures below show the trends of the main recent bear markets in 2000 and 2008, with total declines of 49% and 57%, respectively. Yet while this ultimately ended up being the definitive drop, we saw several rebounds, sometimes even more than 20%, with prices eventually continuing to fall.

Image: Callum Thomas

History is always different, and the trend of the graphs never exactly replicate a past event. We could even retest the new highs and witness a new recovery of the 10-year bull market. However, it is necessary to emphasize the prudence of this period and to not get caught up in the euphoria of rebounds, which are normal and risk deceiving investors.

For the investor who thinks in the medium-long term, the only way to approach these markets consists in the basics of the investment:

• Diversification (by asset class)
• Periodic rebalancing
• Fractional entries and PAC (entry thresholds can be established, for example on drops of 10 to 15% from time to time, with the liquidity still in the portfolio).

Image: Callum Thomas

We come from a strong oversold, from a cosmic pessimism. Therefore, a technical rebound can be normal. As can be seen from the image above, in the face of important weekly gains, the markets almost always continue to rise in the wake of the momentum. 

It's hard to say if this will be the case again, but the important thing is to always do what is called a scenario analysis: it tells us first how we should behave with our investments, depending on whether scenario "A" occurs rather than scenario "B". 

In this way, having a strategy, we will always know what to do and we will never be at the mercy of the markets. Trying to predict the future is almost always bad for our money.