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Are You Prepared For A Bear Market?

For those wanting to know if Singapore’s markets will enter a bear market – normally defined as one where the market’s fallen by 20% – I’m sad to say I have no clue.

The market might yet bounce and reach new heights starting from tomorrow. But the thing is, who knows? As far as I can tell, there isn’t anyone who possesses a perfectly accurate crystal ball.

But what we do know is that at Tuesday’s close of 3,034 points, the Straits Times Index (SGX: ^STI) is now 12% lower than its 52-week high of 3,465 points that it reached on 22 May 2013.

At the time of writing (1:00 pm, 28 August 2013), the STI is at 2,994 points so it’s now creeping even closer to a bear market by being 13.6% lower than the recent high.

But for those who are fretting about the possibility of a bear market, they’ve likely missed the point. What should have been on their minds instead is whether they are prepared for a bear market.

You see, this recent market sell-off has created a fair number of casualties among the blue-chips. For example, beer brewer Thai Beverage (SGX: Y92) is now more than 35% lower than its recent peak at S$0.71 on 22 May 2013.

Retail-mall focused REIT CapitaMall Trust (SGX: C38U) is not far behind as well with its shares declining by almost a quarter from its 52-week high of S$2.45 set on 29 April 2013.

But, without doing any prior study on the companies, how can you tell if Thai Beverage and CapitaMall Trust have become bargains? Without looking at their business, it’s hard to tell as a share’s price movement tells us very little about its intrinsic worth.

And that brings me to a very important tool-kit that I think investors should have – their own personal wish list.

Emotions take a toll on us in financial matters and it makes us commit stupid mistakes. In a falling market, we might become paralysed by fear and make illogically low estimates of the intrinsic value of a business or even fail to take advantage of any bargains. That’s where the wish list can help.

The markets were calm and even logged some nice gains in the first five months of 2013. Such relatively-mundane market conditions are the best time for us to investigate different companies – as we’re largely devoid of fear that can cloud our judgement – and start building a list of shares we want to own only at lower prices

When markets start pulling back, as they inevitably do, that shopping-list of shares can be used to override our fears as all we have to do now is exercise a little discipline to make purchases as we can be confident that our analysis of various businesses was done in largely the best mental state we can be in.

If you’ve done so, then you’re likely well prepared for a bear market to start scooping up bargains when you spot them. But for those who have come unprepared, it’s not the end of the world.

Knowing that fear might impede our judgement goes a long way in improving our analysis even in fearful investing-climates. Besides, there’s always the next pullback to look forward. Markets never move in a linear fashion. They go up, and then they come down and the cycle repeats.

It might be a long while before the next bear market comes along or it might happen the very next day. But regardless of when it happens, I know I’m prepared for it. Question is, are you?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.