If you were hiking in the mountains and stopped in a small river for a drink only to look up and see a bear charging at you, what would you do? Our instinctual reaction in a life-threatening situation, such as being charged by a bear, is to run. But wilderness experts will tell you that instead of running from a bear, you should curl into a small ball.
The moral of the story is that you can’t outrun a bear. And the same is true of metaphoric bears — a bear market, for example.
Anyone who has invested in the past decade, and especially in the past five years, has seen what finance people call a “bear market”. What is a bear market? In the most basic terms, it is exactly what it sounds like: a confluence of unfortunate factors that make the stock market a terrible, scary place to be, especially for inexperienced investors.
Our instinctual response to a bear markets is the same as our reaction to a live bear — we want to run. We want to scramble and get out as soon as possible to protect our investments. The thing about a bear market, though, is that it is a natural period of decline. Inevitably, after a period of large gains, the market will sink. Here are three ways to handle a bear market and come out with all your limbs intact:
1. Don’t run. Just as with real bears, trying to run away from a bear market by selling out and transferring your assets into a cash market will generally yield worse results than just staying put. In fact, by trying to run, you only lock in your losses. Volatility in built into the market system, so you can’t let a bad spell shake your faith. If the market is down, the damage is already done to your investments, so don’t make it worse by jumping ship. Instead, plan for the troughs by taking a long-term approach. If you do this, you’ll be in an optimal position to ride the wave back to a prospering market when it recovers.
2. Take stock. One way to take a long-term approach is to review your asset allocation when the market is down and readjusting the mix based on your risk tolerance. Wise investors will tell you that you should be re-balancing your portfolio at least once a year anyway, regardless of how the market is doing.
3. Be consistent. It’s very important to stay the course, even when the market is down. Typically this means that you should continue to add to your portfolio as you would when the market is up. This strategy is called dollar-cost-averaging — if you have a set amount of money you invest each month, buying more when prices are low and less when prices are high, the average price per share you’ll pay will be less expensive than the standard average share price.
Timing the market is as difficult and futile as running from a bear. So curl up, and wait for the bear to drop you, and you’ll be likely to outperform others who try to run.
Alvina Lopez is a freelance writer and blog junkie, who blogs about accredited online colleges. She welcomes your comments at her email Id: alvina.lopez at gmail dot com.