Tag - bear markets

    • Tag -
  • bear markets
09 Jun

What We Should Remember About Bear Markets: Part II

(In continuation with the previous article…)

Some losses won’t be temporary: For sensibly diversified, long-term investors the losses from most bear markets should be temporary (there is a long-run premium attached to equity investing after all), but investors should not naively assume that everything will recover. Imprudent investment decisions will be exposed in bear markets. Inappropriate leverage, unnecessary concentration, and eye-watering valuations tend to bring about permanent losses of capital that time will not heal.

Emotions will dominate: The ability to make good, long-term decisions during a bear market is severely compromised. The emotional strains that investors are going to feel will outweigh rational thought – what happens if things continue to deteriorate and they do nothing? It is during such times that systematic decision-making – such as rebalancing and regular saving – comes to the fore.

Risk tolerance will be examined: Bear markets are the worst possible time to find out about one’s tolerance for risk. Everyone becomes risk-averse when they are losing money. The issue for investors is that experiencing a 37% loss in real life is very different from seeing it portrayed as a hypothetical situation. If possible, investors should avoid reassessing their appetite for risk during tough periods.

Investors will extrapolate: During a bear market, it’s difficult to perceive anything except doom and gloom. Investors might believe that things will keep getting worse – prices will be lower again tomorrow.

Each bear market will be different: Investors should ignore all charts comparing current declines with other bear markets in history, they are entirely unhelpful. There is no reason to believe that such a deeply complex, unpredictable system should mimic patterns of the past. Each bear market is unhappy in its own way.

Bear markets are the ultimate behavioral test: The outcomes of bear markets are more about investors than they are about the market. Investors entering a bear market with identical portfolios will have wildly different results based on the decisions that they make during it.

Source: ‘What We Should Remember About Bear Markets’ by Joe Wiggins published on behaviouralinvestment.com

Asset Multiplier comments:

  • It is difficult but necessary to remain a long-term investor during bear markets. During times of uncertainty, investors should resist allowing their emotions to influence their rational decision-making.
  • Rather than chasing winners or trying to time the market, investors should concentrate on rebalancing their portfolios and keeping them steady.
  • Accepting that stock markets have ups and downs is a key element of investment discipline. This helps investors protect their capital and maintain their calm amidst turbulent markets.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

By Investment articles , 0 Comments Read more...
02 Jun

What We Should Remember About Bear Markets: Part I

The following article is taken from ‘What We Should Remember About Bear Markets’ by Joe Wiggins.

Bear markets are an inescapable feature of equity investing. They are also the greatest challenge that investors will face. This is not because of the (hopefully temporary) losses that will be suffered, but the poor choices investors are liable to make during them. Bear markets change the decision-making dynamic entirely. In a bear market, smart long-term decisions often look foolish in the short-term; whereas in a bull market foolish long-term decisions often look smart in the short term.

If investors are to enjoy long-run investment success, they need to be able to navigate such exacting periods. There are certain features of bear markets that it pays to remember:

They are inevitable: Bear markets are an ingrained aspect of equity investing. Investors know that they will happen; they just cannot know when or why. Their occurrence should not be a surprise. The long-run return from owning equities would be significantly lower if it were not for bear markets.

It will feel predictable: As share prices fall, hindsight bias will go haywire. It will seem obvious that this environment was coming – the warning signs were everywhere. Investors will heedlessly ignore all the other periods where red flags were abundant and no such market decline occurred.

Nobody can call the bottom: Market timing is impossible, and this fact does not change during a bear market. The only difference is the attraction of attempting it when falling portfolio values can become overwhelming, and the damage it inflicts will likely be greater than usual.

Economic and market news will be conflated: The temptation to interlace economic developments with the prospects for stock market returns can become irresistible during a bear market. Weak economic news will make investors increasingly fearful about markets, despite this relationship being (at best) incredibly hazy.

Time horizons will contract: Bear markets induce panic, which shortens time horizons dramatically. Investors stop worrying about the value of their portfolio in thirty years and start thinking about the next thirty minutes. Being a long-term investor gets even more difficult during a bear market.

Investors don’t consider what a bear market really means: In the near-term, bear markets are about painful and worry-inducing portfolio losses, but what they really are is a repricing of the long-run cash flows generated by a business / the market. The core worth of those companies does not fluctuate nearly as much as short-term market pricing does.

Lower prices are good for long-term savers: For younger investors saving for the long-term, lower market prices are attractive and beneficial to long-run outcomes (it just won’t feel like it).

Source: ‘What We Should Remember About Bear Markets’ by Joe Wiggins published on behaviouralinvestment.com

Asset Multiplier Comments:

  • Losing investment plans during bear markets is inevitable. Although difficult, long-term investors should sit through such exacting periods patiently and stick to their investment approaches.
  • Investors can use bear markets to their advantage by accumulating quality stocks at cheaper valuations and profiting from long-term gains.
  • Investors should avoid getting consumed by noise and immediacy and focus on building wealth over the long term.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

By Investment articles , 0 Comments Read more...