There is no point in lamenting over bear markets, corrections, financial Armageddon, however you may choose to call the markets as of late. It is what it is, and crying our hearts about it cannot do any of us any good. To preempt the fallout of a bear market, rather than offset it after the fact, I apply a few simple rules.
A bear market is a fact of life, and a necessary one at that. It wakes us up, “curbs our enthusiasm,” and punishes our greed. To use Occam’s Razor as a starting premise, whereby the simplest solution tends to be the right one, all anyone basically needs is some common sense.
And, first of all, common sense would require of you, as an investor, to put in the market only the money you can afford to lose. So, don’t go around borrowing money from the bank, or taking out equity loans, or using up that line of credit your wife got to renovate the kitchen. Because when margin calls start coming in, they’re not just coming in, they’re pouring in. And, if you can’t pay the first margin call out of your savings, you certainly won’t have enough money for all the others that are surely to follow.
Also, just because a stock is going down, it does not necessarily mean it is discounted. A falling stock and a discounted stock are two very different things. In my day, I’ve seen too many clients taking advantage of something called “averaging down.” Sure, it is a fine strategy during a bull market. But, during a bear market, it can simply blow your investment to Kingdom Come.
I know you heard it many times before, but learning when to sell is not an easy skill to acquire. Most of the selling that occurs among ordinary investors is panic selling. Yet, getting emotional during a bear market is the worst thing you can do.
So, when it seems like the time has come to pay the Piper, (gosh, I’m loaded with clichés today), simply identify the lowest low at which your losing stock has closed in the past ten days. If the stock closes again below that point, it’s time to sell, simple as that.
Also, when the Bear awakens, don’t go around playing with new toys, and by “toys” I mean don’t go investing in new products or engaging in new strategies that you’ve never tried before. Let’s use Occam’s Razor again, whereby what worked in the past is more likely to work again. In contrast, with new and unproven strategies, there is simply no point of reference, no “landmark,” so to speak, to navigate by.
Finally, be careful with new initial public offerings, particularly those in cyclical industries, such as retail or travel. During a bear market, there is hardly anyone in the buying mood, without which there is no upward price pressure. And, without upward price pressures, what’s the point?