Active funds in a bear market

Figure: Starting from the 'last net-value high', NAV falls to form the bear. When the decline duration nears 50% of the full smile interval (time in place) AND the drawdown reaches the historical bear-market average max drawdown (space in place), their intersection is the staggered-DCA buy zone.

This is Lesson 9 of the Fund Strategy series. Compared with a ranging market, the bear-market tactic is more conservative — the core is staggered DCA only after both time and space are in place, not a one-shot buy.

How to invest in active funds during a bear market?

Compared with a ranging market, the bear-market tactic is more conservative.

1. Buy strategy

In a bear market, buying an active fund must be considered along two dimensions: time and space.

So how do we locate space and time?

1. Time in place

We measure the time of each bull-bear cycle’s new-high interval — i.e. the time of each complete “smile interval” — then compute how long it has been falling from the most recent new high.

We consider time to be in place when the decline duration approaches 50% of the prior complete smile-interval length — the decline is near the tail of the time cycle’s bottom.

2. Space in place

We measure the maximum drawdown of each historical bear cycle, compute the average maximum drawdown across historical bear cycles, and when this fund’s drawdown is greater than and near that average, we consider space basically in place.

3. Staggered DCA

If both time and space are in place, we also watch the current month’s drop.

When the monthly drop is greater than the historical bear-market average monthly drop, we trim and add in tranches — staggered DCA.

Figure: A bear-market buy needs space (drawdown enough), time (decline long enough) and monthly drop (wide enough) all at once, then staggered DCA — not a one-shot bottom-fish.

Here DCA is mandatory. In many places we suggest one-shot buying, but in a bear market the required move is staggered DCA, because only staggered DCA decomposes the risk with multiple entries, dissolving possible downside risk and time cost.

Specific buy conditions:

This year’s drawdown > the average max drawdown of past bear phases;
This decline’s duration ≈ 50% of the longest historical new-high duration;
Monthly drop > the average monthly drop of past bear phases;
Add in tranches.

2. Sell strategy

Many may wonder: why have a sell strategy in a bear market — shouldn’t we just keep DCA-ing?

The main purpose is to boost investor confidence, improve the holding experience, and lower cost.

A bear market does fluctuate; we trim when the fund’s monthly return exceeds its historical bear-market average positive return.

The tactic is to cut half. We don’t cut all because the shares are cheap and valuable, so we buy again when it keeps underperforming, keeping a half-position swing tactic in the bear market to lower cost and risk.

Figure: A bear also fluctuates — when the monthly rebound exceeds the bear average positive return, trim half (not all, shares are cheap), then buy back as NAV falls again; each buyback lowers the average cost.

Specific sell conditions:

The fund’s monthly return > the average return of past bear phases;
Sell 1/2, keep a half position.

Summary

The essence of active-fund bear-market tactics: start staggered DCA only when time and space are both in place and the monthly drop widens; when a monthly rebound exceeds the average, sell half and buy back on the way down — use tranches to dissolve downside risk, use the half-position swing to lower cost. The worst move in a bear is an all-in; staggered DCA is the key to survival.

⚠️ This article is a methodological framework for illustration only and does not constitute any investment or trading advice. Markets carry risk; decisions require caution.