Most markets, and certainly most currencies and commodities, are actually officially inside a bear market. This is the arbitrary term for anything that is down 20 percent from the peak. Obviously, many stocks are down 40 or Half or even more, therefore we may need a new term to explain them – zombie market? That’s, dead but still moving?
Many investors fear a bear market, since it almost guarantees they will generate losses. It also creates opportunities, so we would not suggest running away from a bear. Knowing that, listed here are five things not to do inside a bear market.
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Don’t change strategies
If you are on a losing team, you do not decide at half-time to suddenly place your star striker in goal. Changing strategies isn’t going to work, so stick to your strategy.
If you’re a value investor, don’t purchase growth stocks. Utilize your strengths. The market isn’t good enough without you learning a new investment strategy out of the blue.
Don’t expect it to always be down
After seeing relentless selling, day after day after day, you may resign yourself to continued losses. This is one of the worst things investors can perform. When everyone expects losses, that’s usually about the time markets turn around.
Keep your eyes open for opportunities. There’s always something which might make you some cash at some point, however, you have to be watching for it. For instance, shareholders who stuck with Progressive Waste Solutions Ltd. are up 18% so far this year on a takeover bid.
Whenever there is panic, selling opportunities abound, but you can’t take advantage of them if you are hiding beneath your desk.
Don’t buy expensive hedge products
Exchange-traded-fund providers and brokers might offer all sorts of ways to hedge your portfolio inside a bear market, from market-linked GICs to triple-down leveraged short ETFs.
These products are always expensive, and often fail to work as intended, even in an extended decline. The barn door is already open, the horses have remaining.
Whether these are appropriate products or otherwise (almost always not), time to buy market insurance coverage is before the bear market has hit, not after.
Don’t panic and sell
In a bear market, many so-called experts will start touting doom-and-gloom scenarios. Like RBS’s announcement to “sell everything,” varieties talking about “financial Armageddon.”
It could be scary listening to these folks, but there have been bear markets previously, and there will be bear markets in the future. The world, contrary to popular belief, is not ending simply because oil has broken US$30, and the Nasdaq is down 12 per cent.
Old investors, like me, have experienced it all before. Do not panic then sell. You may see more losses, but panicking is never a solid investment strategy.
Don’t bet on the reversal
Many investors bought energy stocks when oil hit US$40 on the belief that there was no way oil could drop to US$30. Well, here we are, well below US$30 and many are predicting US$10 because the next stop.
Likewise, Baytex Energy Corp. investors thought its stock might change at $10 per share, yet now it dropped below $2.
I don’t know where oil is going to bottom out, nor would you. Just because something has dropped 50 per cent does not mean it cannot drop another 75 percent. Don’t bet on any recovery. Stick with a strategy and diversify.
Peter Hodson, CFA, is CEO of 5i Research Inc., a completely independent research network providing conflict-free advice to individual investors (www.5iresearch.ca).