Surviving the Bear Market
For the last few years, all we’ve heard from pundits and analysts and just about anyone who has anything to say about the markets is, “Buy the dips!” Well, unfortunately, over the twelve months, that policy would not be treating you so well as we’ve seen all three major indexes fall from one low to another. At this point, it’s anyone’s guess when markets will turn positive north again. So, what can you do to survive this downturn?
Change your frame of mind
We’re well beyond 10% or even 15% correction at this point. Not only that, but we’ve seen the market hit multiple support levels and fall through creating lower lows and lower highs. While I was calling on a second half rebound, I’m not so certain anymore. It seems that the bad news on credit markets and consumer spending has not quite trickled out yet. It’s hard to tell if this means maybe the pullback will never materialize or if corporate balance sheets are simply slow to react. Q3 earnings will speak volumes, but with the markets decidedly bearish, it’s time to let go of your hopes for buying dips and turning quick profits.
Re-assess Your Allocations
During a bull market it’s tempting to put large amounts of money into the stock market. Markets are liquid, most of your positions are profitable, and you feel like you can use the stock market like a bank account. No longer is this the case during a bear market. To reap the benefits of your stock picks, you’ll have to commit to them for longer periods of time and you can’t assume that you’ll be able to turn profits on your positions within a few months. In fact, it’s likely that, no matter how good the companies you invest in, your stocks will decline in value.
If you haven’t already, unwind positions in weak businesses. Anything you bought simply on momentum or based on rosy projections of future growth should be sold off with each market rally. That’s right, I’m telling you to sell the rallies!
Judicious Buying
Once your positions are trimmed and you’ve re-allocated any cash you might need liquid access to, you’ll probably be left with a portfolio with few positions and maybe some left over cash. As said before, don’t rush in to buy dips or initiate new positions.
Keep watch of the select stocks you’ve kept. Make sure you have a clear investment thesis behind each one and don’t be afraid to sell if economic conditions fundamentally change the companies you’re invested in. For those select, high-quality businesses that you remain invested in, begin judiciously buying their dips so as to average down your cost of acquisition and ready your portfolio to bounce back swiftly as markets turn.
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Very good advice. Lot of people quickly forget about the overall long term trend, which should be beneficial for most people.