|Coping with a Bear Market|
The S&P 500 has declined a cumulative 38.6% from January 2000
to December 31, 2002. After a bull market in the 90’s where investors
seldom witnessed a retreat in stock prices, the depth
of this bear market has been trying for all. We have learned that risk
is easy to
accept on the upside but has much different ramifications
on the down side.
So how do you cope with this precipitous decline?
The first thing you should avoid is the emotional reaction to flee
to safety. Intellectually, reason says the best thing to do when
the market is down is to buy more. Few investors have the fortitude
to do that. But the worst thing you can do is to make a knee-jerk
reaction and sell at the bottom.
Review & Adjust
The first thing you should do is to review your investment
plan. Why did you buy equities to begin with? Unless your objectives
have changed, equities still offer growth opportunities and a hedge
against inflation. If you are taking an income from an equity portfolio,
you may need to adjust your level of withdrawals. And, if your asset
allocation has changed dramatically, you may need to rebalance according
to your investment plan. But, make certain any adjustments to your
investments are based upon your objectives.
Focus On What You Know
The news media is full of concerns; the threat of
war, accounting scandals and the poor economy. We hear news daily
about unemployment, corporate earnings, politics and terrorism that
is designed to alarm us. This “noise” can easily distract
you and create fear of a difficult future.
Instead of concentrating on the rumor of the day, focus instead on
what you know. For example, we know that interest rates are at a forty
year low. We know that the stock market has risen dramatically following
long bear markets. We know that our economic growth is the combination
of consumer spending, government spending, business investment and
foreign investment in the US. What are the prospects for each of these
factors? When you assess these aspects, you can make clearer decisions
to avoid making the wrong moves.
Making dramatic changes in your investments may indicate that you
are reacting to your emotions. By staying calm and rational, you may
better assess your needs for the future balancing the degree of risk
and return that is right for your personal situation. Paying attention
to the fundamentals will help you resist the urge to chase what worked
last year and, instead, take advantage of what may come this year.