While conventional wisdom says to stay calm and diversify, Australia’s looming bear market carries unique risks that demand more than a passive strategy. The RBA’s aggressive rate hikes have not yet tamed inflation, and the housing market is already cracking. A prolonged downturn could be deeper than many expect, particularly in highly leveraged sectors.
Retail investors are especially vulnerable. Many loaded up on growth stocks during the pandemic and are now sitting on heavy losses. The illusion that ‘buying the dip’ always works ignores the possibility of a lost decade, like Japan in the 1990s. Dollar-cost averaging only works if the market eventually recovers, and there is no guarantee of that.
Furthermore, the Australian economy is heavily tied to China, where growth is slowing and property woes persist. A hard landing in China would devastate Australian commodity exports, hitting miners like BHP and Rio Tinto. That would drag the entire market lower.
Warning signs are everywhere: falling business confidence, rising bankruptcies, and a stretched consumer. Holding cash is safe but carries its own risk if inflation stays high. The best defence may be to significantly reduce equity exposure now, even if it means missing a potential recovery. Complacency could prove far costlier than caution.