Partner Article

Don’t fear the bear

When share prices begin falling dramatically, it can appear your only option is to sell in order to limit losses. I disagree.

As a serious, long-term investor, the difference between success and failure can be determined by the actions you take during a stock market decline.

No one can predict a bear market, but I believe remaining focused on your investment strategy is the best way to weather one.

It’s called a bear market because it resembles a bear attack - rearing up on its hind legs and swiping its paws downward. It’s defined as a sharp decline in share prices, usually 20% or more, almost always triggered by unexpected events or economic conditions.

As a result, investors can often be caught off guard and become susceptible to reacting to the anxiety caused by the reports of doom and uncertainty.

Whilst it’s unlikely you will ever meet a real bear face to face, it’s almost a certainty that you will experience a bear market.

Stock market declines are normal, happen frequently and should not be the sole reason to sell quality investments.

My advice to help survive a bear market is almost identical to that of surviving a real bear attack.

If you were faced with a real bear, keep a cool head and try to stay calm.

Keeping a cool head

Bear markets are usually quite frightening and the Stock Market decline can be dramatic. It almost seems like there is no end in sight and you’ll hear many predictions about how much lower markets could go.

In almost every bear market, the rebound has been just as unexpected, so try not to be swayed by short-term, extreme predictions of doom and gloom.

Make no sudden moves

During and immediately after market declines, the temptation is to sell quality shares, funds and bonds, and to change your investment strategy.

However, investors who try to predict when to get into and out of the market can sometimes pay a severe penalty for not being fully invested when the market starts to rise again.

You should never jump into or out of the stock market. I believe it’s almost always a bad idea to make a long-term investment decision in reaction to short-term market fluctuations.

If your portfolio contains quality investments that are well diversified, my advice is to stay the course during market declines, and stick with your investment strategy.

Although past performance is not an indication of future results, over the long term, an investment into the stock market has historically performed well.

Facing up to the bear

Bear markets can provide the opportunity to buy quality investments at a discounted price, and the price you pay for an investment matters. But why is this the case?

Generally, the lower the price you pay for a quality investment, the higher the potential investment return over the longer term should be.

Here’s another way to think about unsettling markets. Market declines return investments to their rightful owners - those who understand what they own and why they own it.

Your success as an investor can, in part, depend upon your actions during a market decline, so it’s worth remembering that bear markets tend to recover just as abruptly as they start. By keeping a cool head and staying calm, you may well find that there is no longer any reason to fear the bear.

Steve Proctor, Independent Financial Adviser, Fairstone Financial Management.

This was posted in Bdaily's Members' News section by Hannah McGivern .