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Investment: The Bear Market Survival Guide
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The Bear Market Survival Guide

By Michael Dow


Surely it is blindingly obvious by now that global equity markets and commodities in particular are well into bear market territory. What this basically means is that prices are likely to stay on a downward trend for some time to come as panicking institutional and individual investors continue to sell off their holdings. Those of the make a quick buck mentality will of course be terrified at the prospect of markets going down, particularly after they have had such a sensational run over the last three years or so. However, for those of us who are able to keep our cool and are savvy enough to take advantage of opportunities, bear markets don’t have to be so scary.


WBT201510_070__Investment__001_-_001There is no denying that the need to diversify your portfolio is greater than ever before. There are huge disparities between different economies around the globe and different asset classes. Proper diversification, which includes buying a combination of stocks, bonds, REITS, commodities and other kinds of assets – as well as investing in different places around the world – is by far the best way to safeguard you from market volatility. Asset strategy consultant Roger Wohlner points out that, “Diversification among assets with low correlations to one another further reduces risk. Diversification is important because we have no way of knowing which investments or asset classes will perform well or poorly or when. The trick, however is to determine what to use in your investment mix and in what percentages. For example, the 30-year tailwind for bonds is likely behind us so their impact upon portfolio returns over the course of the current decade may be minimal.”


It has to be admitted though that even when you have a highly diversified portfolio there are going to be times when almost all of your holdings are valued at a lower price than you paid for them. That is unfortunately just one of those things that happens every so often and is beyond our control.  As Wall Street legend Peter Lynch once said, “Investing is as much about having the stomach to ride out the bad times as it is about having a brain to use during the good times.” If you panic and start selling off because you have seen a few news reports about an impending financial meltdown then the chances are you are not doing yourself any favours in the long term.


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In addition to staying calm while the markets keep going down, one also has to take advantage of the low valuations so that later on you can enjoy the rebound. One of the best strategies for this is to limit the risks associated with buying individual stocks and simply follow a strategy of consistently buying index funds over time, regardless of the current price. As Warren Buffett, the greatest investor of all time explains: “the average individual investor who consistently saves over the course of their lifetime should just consistently buy low cost index funds and they will do very well over time.” Moreover, he points out that, “the last thing they should be doing is buying and selling stocks… they are simply not in that game and they should not be tricked into thinking that someone can tell them when to trade stocks.” This method is certainly not fancy or exciting in the short term but it has been proven to be effective as a way to surf market volatility time and time again.


Another traditional way of hedging against rapid inflation or bear markets in stocks, bonds and other paper assets is buying precious metals. Gold in particular has long been regarded as the best weapon in the battle against dodgy central bank practices and the bursting of asset bubbles. Since the boom years of the previous decade when gold prices soared and big returns were made by betting against the performance of paper assets, the precious metal has somewhat ‘lost its shine’ as an asset class. However, that isn’t to say that there is no case to be made for including it, along with silver or platinum, in your portfolio. Aside from being a great way to hedge against reckless monetary policy, “Historically, the price of gold has hardly had any correlation with the price of other investment categories," says Jeffrey Nichols, managing director of American Precious Metals Advisors, a firm that analyses the markets for precious metals. "Because of this, it provides an insurance policy against systemic and other risks that might affect [the majority of] your investments and savings.”


WBT201510_070__Investment__004Lastly, but certainly not the least important strategy, there is the age old practice of searching for productive assets that generate cash flow regardless of how the market values them. At some point during a period of economic uncertainty investors will undoubtedly look at the big blue chip dividend giants which derive a certain intrinsic value based on their ability to pay 3-7% yields to their shareholders on a regular basis. This includes the major pharmaceuticals players, the telecom giants and until recently, the big boys in the energy sector. Not only are these companies well positioned to ride out economic downturns, they are also more likely to return a portion of their profits to investors. Of course these firms’ stock prices will take a hit as investors get scared but when optimism returns they are likely to rebound quicker than small caps and there is no denying that getting paid for holding on to your equities takes some of the sting out of the lower valuations.


REITs (Real Estate Investment Funds) provide a different but equally good opportunity to keep the dividend income flowing in a bear market cycle. Take the period following the 2008 global financial crisis as an example. While housing markets around the world plunged into darkness the demand for rental property increased. Obviously it was bad news for people looking to make quick money on property price increases but it meant that REITs, which are legally required to pay out 90% of their profit to shareholders, were able to keep generating healthy cash flow. Whether we are in a bear, bull or stagnant market cycle, it is always fun to be a lazy landlord!


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