Building a "Bear-Proof” Portfolio

Have you wondered about the construction of a ‘bear-proof’ portfolio? Discover the methodologies and findings now!

Introduction

2022 has certainly been a rough year for investors. To illustrate, the PSEi declined by as much as 19% this year, while the Dow Jones Industrial Average, S&P 500, and Nasdaq Indices have all fallen up to more than 20% within the year. This is what investors refer to as a bear market—wherein stock prices (generally represented by the indices mentioned above) experience large, prolonged declines due to a number of different factors such as high interest rates or inflation. It is important to note however that despite the grim outlook of the stock market this year, this is not the first time it has happened. In fact, between 1947 to 2022 alone, there have already been 14 different bear markets in the US (Kolakowski, 2022).

If the history of the stock market has taught investors anything, it is that stocks move in cycles, and that history tends to repeat itself. That said, studying past bear markets may help investors today protect their portfolios and even outperform the index. The focus of this research is to create a portfolio of equities that is proven to be resilient to market downturns, and also performs well after a bear market. The study defines a “resilient” portfolio as one that can outperform key indices by a certain percentage during and after bear markets. Note that the study will be focusing on the Philippine stock market for this project. The bear markets that the study analyzes are the 2008 financial crisis, the 2018 “Taper tantrums”, and the most recent COVID 19 market crash. The decision was made to not use the Asian Financial Crisis (~1998) and the Political Crisis/Tech bubble (~2000 - 2001) bear markets due to the limited amount of data and Philippine stocks for that time period.