How to Navigate Bear Markets: Strategies for Long-Term Investors

When financial markets take a nosedive, it’s easy to feel unnerved, but bear markets are a natural part of the investment cycle. For long-term investors, understanding how to navigate downturns, maximize opportunities, and stay aligned with the local rules and regulations is key to weathering these challenging periods.

What is a bear market?

A bear market typically refers to a decline of 20% or more in broad market indices, such as Singapore's Straits Times Index (STI). Bear markets are often accompanied by widespread pessimism and uncertainty. While this may seem like a negative phase, it’s also a time when long-term investors can find opportunities—if they know how to navigate the storm.

But how do you ensure your investments remain steady in a downturn? What options should you consider when navigating the Singaporean market? Let's break down these strategies step by step.

Diversification: Don’t Put All Your Eggs in One Basket

Diversification is one of the best ways to manage risk in any market condition, including bear markets. In Singapore, this means spreading your investments across multiple asset classes—stocks, bonds, REITs, and even CPF-approved funds.

Example: Singapore REITs

Singapore's real estate investment trusts (REITs) have historically been attractive to investors due to their high yields. Even in a bear market, some REITs, particularly those linked to essential services like healthcare or logistics, might be less volatile. By holding a diversified portfolio, you can reduce the impact of a downturn in any single sector.

Example: CPF Investment Scheme (CPFIS)

Singapore’s Central Provident Fund Investment Scheme (CPFIS) allows investors to use their CPF savings to invest in stocks, bonds, and unit trusts. During bear markets, consider a shift to more stable, conservative funds approved by the CPFIS, which tend to be more resilient during economic downturns.

Stay Invested and Buy the Dips

One of the most counterintuitive but effective strategies during a bear market is staying invested. Selling during a downturn locks in losses, while staying on the course allows you to benefit from the eventual recovery.

Example: Straits Times Index (STI)

Historically, Singapore’s STI has seen cycles of ups and downs, yet it remains one of the benchmarks for Singaporean investors. Long-term investors who stay invested through bear markets and even add to their portfolios during dips have typically benefited from market recoveries.

While timing the market perfectly is next to impossible, many investors find success with a dollar-cost averaging strategy—investing fixed amounts regularly, regardless of market conditions.

By using an open trading platform, you can easily set up automatic investments and diversify across multiple asset classes. These platforms provide the flexibility needed to make regular investments even in volatile markets.

Keep an Eye on Defensive Stocks and Bonds

During bear markets, defensive stocks—those belonging to sectors like utilities, healthcare, or consumer staples—tend to outperform the broader market. Bonds are also a safe haven as they provide fixed income during volatile periods.

Example: Singapore Government Securities (SGS)

In Singapore, government bonds like the Singapore Savings Bonds (SSBs) or Treasury bills are highly secure and can provide a stable income stream during a bear market. SSBs offer flexibility with no capital loss and regular interest payments, which may be particularly appealing when equities are underperforming.

If you're interested in international investments during a bear market, opening a foreign stock brokerage account is another option. This will allow you to invest in foreign stocks, bonds, and other securities that may offer better returns during local market downturns.

Real Estate: ABSD and LTV Regulations

For Singaporean investors with real estate portfolios, it’s crucial to keep an eye on cooling measures, especially the Additional Buyer’s Stamp Duty (ABSD) and Loan-to-Value (LTV) limits. These regulations impact how much you can invest in property, and during a bear market, real estate might appear more attractive due to price corrections. However, ensure that you're compliant with the rules and consider the costs carefully.

Example: Property during Bear Markets

In a bear market, Singapore's property prices might decline, presenting buying opportunities for those with sufficient liquidity. However, real estate purchases are subject to ABSD for both locals and foreigners, and Singapore’s LTV ratio limits how much you can borrow to finance your property, which is why it’s important to assess your financing options thoroughly.

The Importance of Liquidity in Bear Markets

In a bear market, liquidity plays a critical role in determining how well investors can manage their portfolios. Liquidity refers to how quickly an asset can be converted into cash without significantly affecting its price. Understanding liquidity is especially important when markets are volatile.

Why Liquidity Matters

Quick Access to Cash: During a downturn, having assets that can be quickly sold can help investors cover unexpected costs or take advantage of buying opportunities.

Avoiding Deep Losses: Assets with low liquidity can be harder to sell during market slumps, and investors might be forced to accept significantly lower prices.

Defensive Assets: Liquid assets like cash, bonds, or money market funds provide a buffer during downturns. For example, holding Singapore Savings Bonds (SSBs) or government treasury bills ensures stability and liquidity.

CPF and Liquidity

While CPF investments are long-term, having CPFIS-approved funds can offer some degree of flexibility during economic downturns. By shifting toward more liquid, stable options within your CPF portfolio, you can maintain balance without locking up all your capital in illiquid assets.

By incorporating liquidity strategies, Singaporean investors can navigate bear markets with more confidence, ensuring they have the flexibility to make timely decisions when needed.

Tax Advantages for Singaporean Investors

Singapore offers significant tax advantages that can cushion the impact of a bear market for long-term investors.

No Capital Gains Tax: In Singapore, there is no capital gains tax on profits from the sale of investments. This is a huge advantage for investors who hold onto their investments until the market rebounds.

No Dividend Withholding Tax on Singapore Stocks: Dividends from Singaporean companies are not subject to withholding tax, which helps boost returns, especially when stock prices are down.

Taxes on Foreign Investments: Be cautious of taxes on foreign investments, particularly from U.S. stocks. The United States imposes a 30% withholding tax on dividends for foreign investors, which can erode your returns during bear markets. To facilitate investments in foreign markets, consider working with a stock broker for international investors who is familiar with the tax implications and can help you navigate these challenges.

Avoid Emotional Decision-Making

Bear markets can induce panic, but as a long-term investor, emotional decision-making is your biggest enemy. Many successful investors preach patience during market downturns. This is where financial advisors can be valuable, helping you adhere to a well-thought-out plan rather than reacting impulsively to short-term volatility.

Example: CPF as a Safety Net

The CPF system can provide Singaporean investors with some financial cushion during a bear market. With CPF-approved investments in more conservative products, you can maintain liquidity without needing to sell off riskier investments prematurely.

Conclusion: Bear Markets Are Part of the Cycle

For long-term investors in Singapore, a bear market doesn’t have to spell disaster. By diversifying your portfolio, staying invested, and adhering to Singapore’s regulatory framework, you can weather downturns and position yourself to benefit from market recoveries. Always keep an eye on your investment horizon, and remember: bear markets, while challenging, are also opportunities to grow wealth over time.

By understanding the local investment landscape—from CPFIS options to tax advantages—and leveraging defensive assets like REITs, bonds, or property, Singaporean investors can navigate market downturns with confidence. Whether you choose to invest through an open trading platform or seek a foreign stock brokerage account, staying disciplined and informed will help you come out stronger when the market recovers. So, the next time the market takes a dip, take a deep breath, revisit your strategy, and remember that time is your greatest ally in the world of investing.