What to do in a bear market?
Last week we talked about the odds of a bear market occurring. Bear markets are inevitable from time to time. In fact, bear markets will occur once every 3 years for an average of 365 days.
One of the most common definitions of a Bear Market is a 20% drop for at least 2 consecutive quarters. By this definition, we are nearing the bear in the NASDAQ and the TSE 300. Whether we are in a bear market or not, I offer you some timely words of advice about how to deal with a declining market environment:
- Seeing a bear does not always mean you are in danger. Remember that market downturns do not necessarily mean your portfolio is down the same amount. The only share prices that matters to you are those that you own. In Canada, Nortel and other stocks closely related to Nortel have had a significant influence in moving the TSE 300. Remember that a drop in the TSE 300 does not necessarily mean that all 300 stocks have fallen. In many sub sectors like financials and utilities, stocks have increased in value while the index has dropped in value.
- The worst thing you can do is panic. If you do, you’re bound to make ill-considered moves that could cost you. Financial markets are often cruel to those who sell at inappropriate times. Keep in mind that losses are only “on paper” unless you sell! My advice is to think with the head instead of the heart! In fact, when it comes to Grizzly Bears, you are actually supposed to play dead and do nothing. Fighting back can be a very dangerous move.
- Feed the Bears. At the zoo, they tell you not to feed the bears. In investing it is quite the opposite. Investing when share prices are low buys you more shares. One of the best strategies to feed the bear is Dollar Cost Averaging. Dollar Cost Averaging consists of investing a fixed amount at regular intervals, which reduces your average cost over time. By adding to your holdings in the midst of a Bear Market, you increase the number of shares you hold. The more shares you hold, the more you stand to gain when the market rebounds.
- Sooner or later, all bears go back into hibernation. You’ve often heard financial experts preach the merits of long term investing. When markets drop, experts will advise you to hang in and remember that its just a matter of ‘time’ before markets go back up. In my opinion it has less to do with time and more to do with patience. You can have time and no patience. In my opinion everyone has more time than they think. In times of distress, what gets tested is patience. Good things come to those who wait. My father taught me that a long time ago and it is a good lesson to keep in perspective today.
- Seek help from experts. If you find it difficult coping with these falling markets, give a Financial Advisor a call. Often Financial Advisors can put things into perspective. Most advisors have been through times like this before. My advice is because these times can be so emotional, try to talk to more than one advisor. Chances are experts know how to deal with bears better than the amateurs do.
I wish you all the best in these trying times but remember there is always sunshine after the rain. The bull will be back.