News
Surviving the Bear Markets
06/11/2008
Surviving in a Bear Market
With global market conditions changing daily and the constant mention of ‘Bear Market’, investor’s nerves are understandably on edge as they closely monitor the impact on their investments. However, whilst bear markets can be worrying times, they are inevitable, and how you react-during the tough times-can have a significant impact on your long-term objectives.
What is a Bear Market?
The origins of the term are obscure but some say it comes from the bearskin trade in 18th century London. Jobbers would sell bearskins they did not own in anticipation of falling prices, which would enable them to buy them later for an additional profit.This was known as a seller’s market -. Technically it is generally agreed a Bear Market occurs when a stock index such as the FTSE 100 falls by 20% from its recent peak.
The FTSE 100 peak was on 12th October 2007, it closed at 6,730 meaning Bear Market territory started when it fell below 5,385. As it now hovers around the 4,300 mark, we are by definition in a Bear Market.
You will have read endless press articles covering the reasons affecting global markets and why we are currently in a Bear Market. However, rather than adding to the constant feeling of doom and gloom, we feel it would be more useful to provide people with tips to help you survive during a Bear Market and minimise the impact on your investments.
Focus on the longer term
It’s easier to keep your head during a downturn if you take a longer-term view. If you are investing in the stock market, your time horizon should be at least five years. What matters is how your investment performs over your entire investment horizon, not what it’s done today, last week, or over the past couple of months. If you step back and look at equity returns over longer time periods, the picture is far less bleak than the one painted in the first half of 2008.
Diversify your assets
Diversification is the best defence against market volatility. Of course, the appropriate asset mix for you will depend on your time horizon, risk tolerance, and investment goals. But in general, you can lower the overall risk of your portfolio if you own a mix of asset classes.
If you already own a diversified portfolio, remember to look at the bigger picture, not each investment in isolation. Chances are if you are properly diversified, that any poor performer is likely to be offset by another fund that is thriving. This is where multi asset funds such as Fund of Funds or Multi-Manager Funds come into their own. Many investors don’t have the time or expertise to evaluate their investment portfolio so they leave any decisions to the experts. Fund of Funds / Multi-Managers actively monitor global markets and use their expertise to make any decisions regarding asset allocation and investment choice on behalf of the client.
Maintain Reasonable Expectations
If you understand how a fund is likely to behave and you’ve been honest with yourself about your risk tolerance, you’ll be less likely to sell a good fund when times get tough. While there’s certainly no guarantee that a fund will behave as it has in the past, historical results can be instructive in setting expectations.
Don’t panic
While the current economic situation is certainly serious, the constant drumbeat of bad news can make the situation seem overwhelming, and it’s understandable if some investors are getting a little panicky. But as we all know, panic rarely leads to good decisions!
While cashing out might initially make you feel like you’re taking steps to protect your wealth, it brings with it a whole new set of worries. Most notably, how will you determine when it’s safe to get back into the market? If you wait too long, you could miss out on most of the recovery.
Studies have repeatedly shown that the odds are stacked against market timers (someone who assumes he or she can forecast when the stock market will go up and down) because missing just a few of the best and/or worst days can have a major impact on your results. This can be demonstrated in the following table provided by Fidelity which shows the impact of missing the best days.
| Market | Index |
Stayed fully Invested |
Best 10 days missed |
Best 20 days missed |
Best 30 days missed |
Best 40 days missed |
|
UK |
FTSE All-Share (£) | 8.89 | 5.90 | 3.62 | 1.64 | -0.17 |
| USA | S&P 500 (USD) | 9.88 | 6.45 | 3.80 | 1.47 | -0.55 |
| Germany | DAX 40 (EUR) | 10.29 | 5.53 | 1.91 |
-0.96 |
-3.45 |
| France | CAC 40 (EUR) |
9.82 |
5.46 | 2.33 | -0.33 | -2.65 |
| Hong Kong | Hang Seng (HKD) | 12.02 | 5.31 | 1.25 | -2.10 | -4.94 |
As you can see, missing the best days can have a big impact on your annual returns. Putting this into context if you had invested £10,000 in the FTSE All Share 15 years ago and stayed fully invested you would have received £35,877.31. If you had missed the best 10 days you would have received only £23,628, almost 35% less. The odds of cashing out in time to miss the worst few days and getting back in time to catch the best few days are extremely low.
Although these tips will not remove the impacts of current market conditions it will help to minimise how they affect your portfolio. If you remember why you invested in the first place and your objectives then, you should be able to focus on the bigger picture and take a long term view of your investments.
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