Most investors in the stock market are today looking at some nasty losses in their portfolios. Some investors may have already sold shares and incurred losses while others may be nursing stocks that have lost 50% or more of their value since late 2007 and hoping they will recover some value. The question that confronts all of us now is: what do I do from this point onwards?
Firstly I would like to suggest readers quickly look at my Investment Tips as these may help with any review of a stocks or investment portfolio. I appreciate there are books dedicated to assisting investors putting together an investment portfolio but in my experience many of this books can be condensed into a few simple tips. Please also understand I am not offering any formal investment advice nor am I a financial planner. (or wish to be one)
So now let’s confront the current reality most of us investors now face, and that is we are looking at our once beloved shares and investments portfolios and seeing plenty of red figures. Corporate giants like Macquarie Group (MQG) Wesfarmers (WES) and Telstra (TLS) have seen their share prices tumble, Listed Property Trusts (LPT’s) have been decimated and even the normally robust Listed Investment Companies (LIC’s) have been hit hard.
If we look at the ASX 200/All Ords then it becomes even more depressing as these are struggling to remain above 3000 and are flirting with levels last seen in 2002. If you started getting into the stock market during 2007 then this current market correction would be particularly nasty and you could easily have paper losses of 60% or more across your entire portfolio.
But before working ourselves into a panic let’s look at what main options we have open to us at this stage of the bear market before we make any rash decisions.
Sit on our hands and hope things will recover. (i.e. do nothing)
I am not a big fan of this approach as it is akin to being paralysed by fear. Maybe there is nothing you can do due to a lack of available funds but I would suggest you still keep a close eye on your portfolio and look for opportunities either to sell on market rallies or buy (if you can) a beaten down blue chip stock.
If you feel however comfortable with your holding then doing nothing can be the right approach, do not feel under any pressure to make something happen especially if you are a long term investor. I would suggest however you do a little portfolio maintenance as explained below.
Sell out of our positions. Cut our losses and live to fight another day.
If you need the money and you have stocks that you feel will never recover then this may be an option. Personally I am never inclined to sell stocks in the midst of a bear market. It would have been great in hindsight to sell most of my holdings in November 2007, March 2008, June 2008 etc. but I didn’t and it makes no sense to me to do it now.
I am not a stock market investment guru, I have been burnt just like most other investors but selling now would just lock in the downside and limit the chance for me to ride any rally. If I need to clean out some dud stocks I will do that during a rally when hopefully I will get a better price.
Buy more shares in quality companies.
Overall I am a buyer when stocks are down and I try to sell a little when the stocks are up. Therefore when the market crashes I tend to be in buy mode rather then sell mode. For example I started buying small parcels of shares (as I mentioned in this blog) when the market was around 4800 level and had my fingers burnt as the market fell though 4000 and headed towards 3000.
But I am less burnt than people who entered the market at the 6500 level. My belief is that quality companies will shine again when all this mess is over and that the prices we see today for many blue chip companies will not be seen again for many years. I cannot pick the bottom with any great accuracy nor can anyone else so I simply buy when I think a stock is great value. If it falls another 10-15% so be it, I will just grab a few more and hope (and I mean hope) that in 2011 I will be in a good position again.
This is a somewhat risky approach and I would certainly not be taking any out margin loans to be buying stocks at this stage, but it is one that I feel will pay off over the longer term. If you do not have cash available to invest then you probably want to do nothing at this stage; buying into a bear market is not for everyone. In any case there is no guarantee that stocks will not fall further…so proceed with caution especially in a bear market like this one.
Do some portfolio maintenance.
A bear market can be a good time to have serious look at your portfolio. During a bull market most major stocks look good, but in a bear market companies that took excessive risks or managed cash poorly get hit hard and many of the true quality stocks shine. Now is the time to make some notes about what stocks you feel are your long term holds and which ones you would sell if there is a major rally.
Maybe there are a few dud stocks that will never recover so you might want to sell them if an opportunity arises and use the cash elsewhere. If you have some cash available you might want to buy some quality stocks as I mentioned above, of if you are pressed for cash you might have to sell some holdings to improve your cash flow.
Remember to get help from a reliable financial planner or adviser if you feel overwhelmed when trying to make any investment decision. If you have a good financial adviser they should know your situation in detail and be able to guide you through troubled investment times although having said that, I do feel the financial planning industry needs to have a very hard look at the way it operates as clearly some self funded retirees have not been given what I would consider very sound advice. If you have doubts about the financial advice you are getting then seek a second opinion.
I hope the above points make some sense. If you have other tips on dealing with a bear market then please feel free to leave a comment.
Finally some words of wisdom from Peter Lynch:
” You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”