Investing in a Bear Market | Investment Tips to Help You Survive it
Three investment tips for surviving the bear market
Investing in a bear market is tricky. Markets are driven by sentiment. When that turns negative, even good companies can see their share prices dragged down.
Below, we give you our three top tips for investing in a bear market.
How to invest in a bear market – 3 things investors should remember
Bear market investing calls for bear market rules. What worked best in the 2003-2007 bull market won’t work best now.
So it’s important to adapt your investing strategy.
Here are The Fleet Street Letter’s three tips for investing during the nascent bear market:
Investing in a bear market: The hunt for undervalued shares
Don’t throw the baby out with the bathwater. There are stocks worth investing in right now.
Here at The Fleet Street Letter we are growth investors. And growth takes time. One of the inevitabilities of long run investing is that we will experience downturns. This bear market is one of them.
As the old saying goes, no market goes up in a straight line…
But bear markets can provide great opportunities. Remember I said even good companies can have their share prices dragged down? Investors call this ‘downside correlation’. Downside correlation can seem like your worst enemy. But it could also be your best friend…
You see, a bear market offers the chance to do some good, old-fashioned value investing. Many investors have made the biggest profits of their lives from investing when sentiment was bearish.
The rationale is simple – pick up stocks in a bear market (when they’re cheap), and sell them once they’ve recovered.
But you have to invest in the right kind of companies. They need to be companies that offer solid, long term growth potential. And they have to be diversified enough to withstand the battering of a bear market. Large cap stocks have been unfashionable lately. We believe this bear market will make them fashionable again. Investors will seek quality, and the blue chips of the FTSE 100 offer it.
Not only that, but much of the recent small and mid cap growth was caused by merger and acquisition activity. Private equity groups would borrow money and buy up small and medium sized companies. This gave support to their share prices.
Now that the credit bubble has burst, merger and acquisitions have ground to a virtual halt.
Investing in big companies also offers other advantages. Large caps tend to have a diverse range of revenue streams. Small caps, by contrast, are usually too specific. If the ‘thing’ in which a small cap specialises takes off, then great!
But if it doesn’t, you’re in trouble. And a bear market is not the time to undertake speculative investing.
So our advice is simple. When hunting for undervalued shares, start your search at the larger, established end of the market.
Investing in a bear market: Why non-stock assets are important
In financial parlance, the bear market means it’s time to be ‘underweight’ in stocks.
In practice, that means selling any shares you’re not convinced about. Now, selling stocks may crystallise some of your losses. But it sometimes better to cut your losses than become married to a position. A bear market is one of those times.
If you’re not confident about the long-term risk/reward profile on offer, seriously consider selling the position. Even if it means taking a hit.
But that’s not the end of the story. If you want to stay invested during the bear market, there are things you can do. You can invest in non-stock assets. These are assets that are not directly correlated with the stock market.
Government bonds would be one example. Gold and precious metals is another.
Investing in a bear market: Don’t forget cash!
Don’t be afraid to hold cash. True, cash is eroded by inflation. Hold cash forever, and – barring an unprecedented period of deflation – you’re guaranteed to be poorer.
But there’s a lot to be said for holding cash in the short run. If you are uncertain – and you’ve every right to be in the current climate – don’t be afraid to sit it out until an opportunity comes along about which you’re confident.
You may find that, for a while, you become ‘overweight’ in cash, relative to your usual investing habits. So be it. Remember – bear market rules apply. You can’t lose if you don’t play.
It also goes without saying that you should never put all your money into any one holding. That’s true always, and especially at times like this.
Bear markets are an unfortunate feature of investing. But they don’t last forever. Keep an eye out for uncovered value as share prices fall. And always be aware that there’s more to investing than stocks.
Ben Traynor
Editor
The Fleet Street Letter P.S. If you enjoyed this article then we encourage you to sign up for The Fleet Street Letter. Get contrarian, cutting-edge analysis for sensible, long-term investments that secure you high growth and healthy dividends.
*The Fleet Street Letter is a regulated product issued by Fleet Street Publications Limited. Shares recommended may be small company shares. These can be relatively illiquid and hard to trade making them riskier than other investments. Some shares may be denominated in a currency other than sterling. The return from these may increase or decrease as a result of currency fluctuations. All portfolio figures are based on virtual performance and are calculated using the closing mid-prices on the date on which shares are first recommended, they do not take into account subsequent re-recommendations at a different price. All gains are gross, and returns will be affected by dividend payments, dealing costs and taxes. A full portfolio is available on request. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Editors or contributors may have an interest in shares recommended.
Investing in a bear market is tricky. Markets are driven by sentiment. When that turns negative, even good companies can see their share prices dragged down.
Below, we give you our three top tips for investing in a bear market.
How to invest in a bear market – 3 things investors should remember
Bear market investing calls for bear market rules. What worked best in the 2003-2007 bull market won’t work best now.
So it’s important to adapt your investing strategy.
Here are The Fleet Street Letter’s three tips for investing during the nascent bear market:
- Keep an eye out for undervalued stocks. But stay away from small caps.
- Invest in assets other than stocks
- Don’t be afraid to hold more cash than usual
Investing in a bear market: The hunt for undervalued shares
Don’t throw the baby out with the bathwater. There are stocks worth investing in right now.
Here at The Fleet Street Letter we are growth investors. And growth takes time. One of the inevitabilities of long run investing is that we will experience downturns. This bear market is one of them.
As the old saying goes, no market goes up in a straight line…
But bear markets can provide great opportunities. Remember I said even good companies can have their share prices dragged down? Investors call this ‘downside correlation’. Downside correlation can seem like your worst enemy. But it could also be your best friend…
You see, a bear market offers the chance to do some good, old-fashioned value investing. Many investors have made the biggest profits of their lives from investing when sentiment was bearish.
The rationale is simple – pick up stocks in a bear market (when they’re cheap), and sell them once they’ve recovered.
But you have to invest in the right kind of companies. They need to be companies that offer solid, long term growth potential. And they have to be diversified enough to withstand the battering of a bear market. Large cap stocks have been unfashionable lately. We believe this bear market will make them fashionable again. Investors will seek quality, and the blue chips of the FTSE 100 offer it.
Not only that, but much of the recent small and mid cap growth was caused by merger and acquisition activity. Private equity groups would borrow money and buy up small and medium sized companies. This gave support to their share prices.
Now that the credit bubble has burst, merger and acquisitions have ground to a virtual halt.
Investing in big companies also offers other advantages. Large caps tend to have a diverse range of revenue streams. Small caps, by contrast, are usually too specific. If the ‘thing’ in which a small cap specialises takes off, then great!
But if it doesn’t, you’re in trouble. And a bear market is not the time to undertake speculative investing.
So our advice is simple. When hunting for undervalued shares, start your search at the larger, established end of the market.
Investing in a bear market: Why non-stock assets are important
In financial parlance, the bear market means it’s time to be ‘underweight’ in stocks.
In practice, that means selling any shares you’re not convinced about. Now, selling stocks may crystallise some of your losses. But it sometimes better to cut your losses than become married to a position. A bear market is one of those times.
If you’re not confident about the long-term risk/reward profile on offer, seriously consider selling the position. Even if it means taking a hit.
But that’s not the end of the story. If you want to stay invested during the bear market, there are things you can do. You can invest in non-stock assets. These are assets that are not directly correlated with the stock market.
Government bonds would be one example. Gold and precious metals is another.
Investing in a bear market: Don’t forget cash!
Don’t be afraid to hold cash. True, cash is eroded by inflation. Hold cash forever, and – barring an unprecedented period of deflation – you’re guaranteed to be poorer.
But there’s a lot to be said for holding cash in the short run. If you are uncertain – and you’ve every right to be in the current climate – don’t be afraid to sit it out until an opportunity comes along about which you’re confident.
You may find that, for a while, you become ‘overweight’ in cash, relative to your usual investing habits. So be it. Remember – bear market rules apply. You can’t lose if you don’t play.
It also goes without saying that you should never put all your money into any one holding. That’s true always, and especially at times like this.
Bear markets are an unfortunate feature of investing. But they don’t last forever. Keep an eye out for uncovered value as share prices fall. And always be aware that there’s more to investing than stocks.
Ben Traynor
Editor
The Fleet Street Letter P.S. If you enjoyed this article then we encourage you to sign up for The Fleet Street Letter. Get contrarian, cutting-edge analysis for sensible, long-term investments that secure you high growth and healthy dividends.
*The Fleet Street Letter is a regulated product issued by Fleet Street Publications Limited. Shares recommended may be small company shares. These can be relatively illiquid and hard to trade making them riskier than other investments. Some shares may be denominated in a currency other than sterling. The return from these may increase or decrease as a result of currency fluctuations. All portfolio figures are based on virtual performance and are calculated using the closing mid-prices on the date on which shares are first recommended, they do not take into account subsequent re-recommendations at a different price. All gains are gross, and returns will be affected by dividend payments, dealing costs and taxes. A full portfolio is available on request. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Editors or contributors may have an interest in shares recommended.
Your capital is at risk when you invest in shares – you can lose you some or all of your money, so never risk more than you can afford to lose. Figures may refer to the past or be forecasts. Past performance and forecasts are not reliable indicators of future results. The FSA does not regulate certain activities, including the buying and selling of commodities such as gold. If in doubt about the suitability or taxation implications of any investment, seek independent financial advice.
Articles published before 1st May 2010 were published by Fleet Street Publications Ltd.
Other articles about investing in a bear market
Surviving The Coming Bear Market
-
The FTSE 100 is flirting with The Bear. But move away from the blue chips, and we see the mid caps of the FTSE 250 first entered it back in January (I'm defining a bear market as a 20% fall from the peak).
Looking for more about investing in a bear market
Google Finance
-
Google Finance offers a broad range of information about stocks, mutual funds, public and private companies. In addition, Google Finance offers interactive charts, news and fundamental data.
Market trends - Wikipedia, the free encyclopedia
-
The terms "bull market" and "bear market" describe upward and downward movements .... In a secular bear market, the 'primary' bull markets are sometimes ...
Yahoo Financial Glossary | Bear Market
-
Any market in which prices exhibit a declining trend. For a prolonged period, usually falling by 20% or more.