Tuesday, October 14, 2008

Six ways to chill in a bear market

Greed (bull) and fear (bear). These are two words investors often hear and think of, but are unable to control their emotions when it comes to investing. In fact, when stock markets are north-bound, their confidence in buying increases considerably.They buy stocks irrespective of their high price-to-earning ratio and are sure to make good money. If, however, the markets enter a bearish phase, their confidence goes down, leaving them wondering where did they go wrong?The chaotic bear market environment then sets the stage for fear to creep into their minds, thus impacting investment decisions. To make sure that you successfully weather the raging market storms, here are six ways to drive out your fears of losing money in a bear market.
STAY CALM AND ACT SMART
Easy to say than follow. It is true that bear markets spread panic among investors, often causing them to sell all the stocks they hold. But a smart investor, according to capital market experts, is one who gets on with the job of picking up value stocks, notwithstanding where the tide of the market is moving.“Such an investor is rightly rewarded with great profits once the market turns. Since we fail to control our emotions, we forget that investment in equity is not for short term. So for long-term benefit , it is important to stay calm and act prudently in such times,” advises Ashok Kumar Jain, chairman and managing director, Arihant Capital Markets.
SET REALISTIC GOALS
You may have earlier doubled your money in a short span, say six months, by investing in a particular stock during a bull run, but you must remember — what goes up, comes down. Stock investing is not about speculating or making easy money. It is an art and science of buying good businesses at cheaper valuations.“It is important to set realistic goals for your portfolio’s long-term return , and buy only good companies with strong fundamentals and good management,” says Jain. To nip your fears in a bearish market, you should avoid selling just because stock prices have dropped.“You must review your stock portfolio rationally. Then only you should arrive at a decision to sell losers whose future prospects look weak, and hold on to winners with prospects that remain solid,” advises Jain.
DON’T TRACK THE MARKET
Another way you can soothe your nerves in a bear market is by not following the stock markets on a daily basis. Every investor knows that you should buy low and sell high.Bull markets provide you a chance to sell high. Bear markets, however, offer you a chance to buy low. Unfortunately, too many investors are lulled into complacency during bull markets and scared out of their wits in bear markets.So they do just the opposite, buying high and selling low. “Thus, you should avoid tracking the stock markets daily during a bearish phase. This way you will save yourself from unnecessary anxiety and fear,” says Amar Ambani, V-P , research, India Infoline.

SET ASIDE EMERGENCY FUNDS
Investors have the tendency to overinvest during a bull run, which becomes a reason for fear when the markets turn choppy. Ambani holds the view that to counter such a situation, you should have sufficient liquidity in hand for emergencies.“This will make sure that you aren’t forced to sell equity holdings or other assets before the time and price are right,” he says. To emerge as a winner, all you need to do is recognise the fact that your portfolio will decline from time to time, but take solace in knowing that short-term pain is required for long-term gain.
SEE THE POSITIVE SIDE
To make money in equities, it is important to be rational, not emotional. “You should always try to look at the positive side in a bad market,” says Ambani. Citing an example, he says that a bear market provides an excellent opportunity to buy strong businesses at rock bottom prices. Jain adds that no one can tell you when the next bull market will begin, how long will it last, or how high the market will ultimately go.“That should be the key point to drive out your fears in a bear market. So even if the markets are down, you should be convinced that your business is making money. The stock price may not generate great returns due to the bearish phase, but in the long term, your portfolio’s returns will be unmatchable,” he says.Warren Buffett was recently quoted as saying: “I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” You don’t get maximum pessimism during bull markets. You get them when the world looks like it’s falling apart. Times like now, for instance.

STUDY BEHAVIOURAL FINANCE
Last but not the least, you can study behavioural finance to calm your fears in a bear market. For the uninitiated, behavioural finance pairs emotions with investments and shows how emotions and cognitive errors can cause disasters in investment decisions. “Individual behaviour, temperament and psychology play an important role in determining investment success. Equity price movements are nothing but a summation of individual behaviours, reflecting their greed and fear,” says Ambani.As always happens, even experienced investors are susceptible to making judgment errors identified by behavioural finance research. “It can help you to be watchful of your behaviour and, in turn, avoid mistakes that will decrease your personal wealth. It provides a platform to learn from people’s mistakes, to modify and improve your overall investment strategies and actually profit from identifying these mistakes,” feels Jain.As for the bottomline, just as it is important to know when to exercise caution, the same way it is important to comprehend when to abstain from fear. Happy investing!

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