If you time it right, you can buy stocks when they are at their lowest or nearing their lowest point
Many investors often fear a bear market, as
it can lock up their investments for an indefinite time frame. However, a bear
market can also be an opportunity if you make the right moves. Let us
understand why timing is important for investing in a bear market and how you can
get it right.
What is the right time to invest in a
bear market?
In a bear market, stock prices fall continuously
over a period of several weeks or even months. It is very difficult to
determine when the prices of a stock have hit rock bottom. There can also be situations
when a stock may see a temporary revival, but prices start to fall again within
hours or a few days. Let us understand this with an example. Suppose price of
stock A was at Rs 100 before the bearish trends gripped the market. After a few
weeks, the price of stock A falls to Rs 70.
In this situation, many investors may
consider buying stock A. However, it is possible that the stock price may fall
further in a bear market. In case the price of stock A falls below Rs 60 or Rs
50, it will essentially lock up your funds. You can exit by selling the stock,
but it will lead to a loss. That is why finding the perfect time to buy stocks
in a bear market is necessary. How you can do that is described below.
How to find the right time to invest in
a bear market?
Dollar-cost averaging (DCA) - Predicting the lowest price point of a specific stock can be
quite difficult even from seasoned investors. Instead of trying to find the
lowest price point, you can invest a fixed amount every day or every week. You
have to do this irrespective of the increase or decrease in the price of a
particular stock. When prices are lower, you can get more shares. And when
prices are higher, you will be getting relatively less shares. This approach
helps smoothen out the volatility seen in a particular stock. It can be quite
useful in optimizing profits in a bear market.
Look at the India VIX (volatility index
on NSE) - This can provide an indication of whether
the market is experiencing an overselling situation. If the India VIX sees a
spike of more than 20-25%, it could potentially be hinting at an overselling
situation. This phenomenon occurs when there is too much panic selling in the
stock market. You can think about buying a stock when the panic has just
started to ease and the stock is seeing a rebound in its prices.
Relative Strength Index (RSI) - Technical analysis tools such as Relative Strength Index (RSI)
can help you find the best time to buy or sell a particular stock. The RSI can
fluctuate from 0 to 100. When RSI is below 30, it is indicative of panic selling
in the market. This can be an appropriate time to invest in a bear market. And
when RSI reaches above 70, it is indicative of a reversing trend.
Follow FII movements - In the Indian stock market, FIIs play a key role in determining
the trajectory of many stocks. When FIIs start selling, the stock markets can
see prices fall quite quickly. And when FIIs start investing again, the stock
prices start to rise rapidly. If you follow FII investments, you can find a
suitable time to invest in a bear market.
Study the fundamentals - Before investing, check the fundamentals of a particular stock.
If the fundamentals are strong, you can buy that stock even if it may be
undervalued right now. History shows that many top performing stocks often
witness overselling during a bear phase. This can be the right time to buy such
stocks.
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