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Which Is a Better Investment in a Bear Market: Public or Private Companies?

Guest Post | Jun 27, 2022

Investing in a bear market - Which Is a Better Investment in a Bear Market: Public or Private Companies?Contrary to popular perception, investing in bear markets can be very profitable. You just need to be a bit careful and choose the correct stocks to invest in.

Do you know what a bear market is? When the market index falls by 20 percent or remains between 10 and 19.90 percent, it is called a bear market. It appears just after an economic recession. It is caused by inflation, high interest rates, and more.

Is your head spinning at the thought of choosing between public vs. private companies? How do you know which is better during a bear market?

Let's compare public and private equity valuations and see where to invest in a bear market.

During a Bear Market, What Should Investors Do?

Investors should invest as they do under any market conditions, i.e., with a long-term view. A good strategy is to have a diversified portfolio and be willing to take on some risk.

When investing for the long-term in a bear market, investors should look for a few things:

Coffee Stocks

You should always look for stocks with a lot of future potential, like Monster Beverage, Coffee Holding Co., Nestle, and more. These coffee stocks are the best ones to invest in.

After water and tea, coffee has a great position in America. So you can get an idea of how popular it is and what its future looks like.

If you can find coffee stocks for a low price, buy them because they might go up in price over the next few years. Then you can be sure of having a solid position in the stock market.

Don't Expect to Pick Up the Bottom

Buy stocks of a company whose price has started falling. Don't worry if the price drops a bit after you buy it.

In the long run, it will become a great purchase. So don’t expect to see the price fall at the bottom.

High-demand Businesses

During bear markets, consumer staples, utilities, and health care tend to do better than other stocks.

In a bear market, the rising interest rates and slowing economy often hurt companies that deal in non-essentials. But good businesses have solid business models.

People invest in them for a long time. It works better than investing in companies with weak fundamentals. "Defensive stocks" is another name for them.

Gradually Increasing Low-priced Stock

Keep buying the stocks at a low price. It will increase the number of your holding stocks. Even if the price increases, you can still buy shares much lower than in the past.

Invest Regularly and Over Time

You can keep investing, buying stocks, and continuing financial activity in a bear market. For example, consider an equity crowdfunding campaign in the middle of a bear market.

If you have a 401(k) at work, make sure to put money in it regularly. It will help you buy more stock at a lower price.

It is a good plan, without a doubt.

Rebalance Your Portfolio to Stay on Track

You should rebalance your investment portfolio so that the different asset classes each have various percentages of the total. It will make it easier for you to acquire assets that fall below the ratio that you have set as a target.

How to Predict a Bear Market and Where to Put Your Money

During a bear market, some investors don't know what to do with their money. They become confused about investing in public vs. private companies: Which is better during a bear market?

Selling in a Hurry

Panic selling during a bear market is felt by many investors. Investors become anxious to liquidate their stocks for cash. Plus, they also tend to shift to government bonds.

Initially, selling stocks in a bear market may seem like a smart thing to do. But in the long run, it's a very risky thing.

Many investors sell during downtimes, which usually marks the end of a bear market. It reduces their long-term returns. As they miss the turning point in the market, they tend to underinvest for a long time.

You don't know if you can time the market right, and you're going against the stock market's long history of making up the losses after a bear market.

Risk-offset

In a bear market, there are many ways for an investor to choose instruments that pose a bad risk. It's also like taking tactical opportunities, like long-term Treasury bonds.

You can use inverse ETFs, short positions on individual stocks, and put options to take advantage of short-term drops in stock prices. Plus, it increases the value if the bear market is followed by a recession.

Whether it's an option premium paid or the maximum return cap on an annuity policy, all hedges have a cost. A structured investment can limit your gains but protect you from losses like annuities.

Furthermore, you can diversify and lower your portfolio equity to get the same benefits for less money.

A Defensive Approach

Stock market sectors alone are not good enough for a bear market. So the very first thing to do is to get different types of assets in the portfolio.

Volatility gets worse during a bear market situation and causes unstable changes in an investor's portfolio. But diversification controls it effectively.

Certain goods and services tend to be in demand, whatever the market conditions are: for example, utilities or health care products.

They help to generate cash and get high dividend yields. This becomes significant for many companies with a good balance sheet. Even in a bear market, they have a good share position compared with others.

Even though riskier stocks are risky throughout a down market, there is evidence that they do not beat safer ones in the long run. So it is good to clear out the riskier stocks during a bear market.

Bargain for Stocks

You can buy stocks at cheap rates with the help of bargaining. The price of every bear market has eventually become high later in history. So it's good to invest in stocks every month.

You can also buy riskier stocks at the end of a bear market. These have a great chance to do well from the beginning of recovery. But your hopes can be crushed if the bull market turns out to be another bear market.

Public vs. Private Equity Valuation and Profit

Most of the time, it is easy to figure out publicly-traded companies' and funds' prices and performance. For public companies, all you have to do is look at market prices and measure how they change.

But do you know how to figure out the value of a private company? For a comparable company analysis, you might need to find public companies similar to the private company in question.

The balance sheet is the best and most simple way. It helps figure out how much the book is worth.

See:  Tiger vs. SoftBank: Inside the investing playbooks that upended Silicon Valley

Private equity firms have the best information about how much a private company is worth. There's a need for lots of data like balance sheets, decisions made, and other records. It will help to find accurate estimates of what they will pay.

But the valuation metrics do not work out as the market rises. For example, book values are not affected when the market brings short-term changes.

This means that private equity can do worse when market prices are increasing and much better when they are decreasing. It works opposite to their public equity.

The argument might seem made up. But it makes sense when you compare the performance of private equity to changes in the book value of public companies instead of their market price.

Over time, you can see that these differences will go away.

High net-worth individuals always find private equity a profit-making investment. But greater return comes with greater risk, as in venture capital, crowdfunding, private equity, and other alternatives.

In the private equity market, success depends on a high tolerance for risk and substantial liquidity. Furthermore, you might need one or more years to swell private equity investments.

Whether you invest in public or private, just make sure the business model is sound and there will be demand for that product in the future.

Similarly, investing in a private company will give you profit in the future, maybe for a long time. Plus, you will get enough time to pass through the bear market situation and make a profit in the bull market.

Conclusion

Everyone wants a bull market that raises stock prices. However, a downturn in the market can be an excellent time to add to your stock portfolio.

Stock sales can lose the market. How about low-priced stocks? Your stock price will rise when the bear market turns bull. You might make more money than expected.

Hopefully, you have found your answer about investing in public vs. private companies during a bear market? Start buying stocks today to boost your numbers.


NCFA Jan 2018 resize - Which Is a Better Investment in a Bear Market: Public or Private Companies?The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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