By Peter Hodson
Jan. 23 (Financial Post) -- Most markets, and certainly
most currencies and commodities, are now officially in a bear
market. That's the arbitrary term for anything that is down 20
per cent from its peak. Of course, many stocks are down 40 or
50 per cent or more, so we might need a new term to describe
them - zombie market? That is, dead but still moving?
Many investors fear a bear market, because it almost
guarantees they will lose money. It also creates opportunities,
so we would not suggest running away from a bear. With that in
mind, here are five things not to do in a bear market.
(1) Don't change strategies
If you are on a losing soccer
team, you don't decide at halftime to suddenly put your star
striker in goal. Changing strategies isn't going to work, so
stick with your game plan.
If you are a value investor, don't start buying growth
stocks. Utilize your strengths. The market is bad enough
without you trying to learn a new investment strategy all of a
sudden.
(2) Don't expect it to always be down
After seeing relentless
selling, day after day after day, you might resign yourself to
continued losses. This is one of the worst things investors can
do. When everyone expects losses, that's usually about the time
markets turn around.
Keep your eyes open for opportunities. There is always
something that might make you some money some day, but you need
to be watching for it. For example, shareholders who stuck with
Progressive Waste Solutions Ltd. are up 18 per cent so far this
year on a takeover bid.
Whenever there is panic, selling opportunities abound, but
you can't benefit from them if you are hiding under your desk.
(3) Don't buy expensive hedge products
Exchange-traded-fund
providers and brokers might offer all sorts of ways to hedge
your portfolio in a bear market, from market-linked GICs to
triple-down leveraged short ETFs.
These products are always expensive, and often do not work
as intended, even in a continued decline. The barn door is
already open, the horses have left.
Whether these are appropriate products or not (almost
always not), the time to buy market insurance is before the
bear market has hit, not after.
(4) Don't panic and sell In a bear market
many so-called
experts will start touting doom-and-gloom scenarios. Like RBS's
announcement to "sell everything," or others talking about
"financial Armageddon."
It can be scary listening to these folks, but there have
been bear markets in the past, and there will be bear markets
in the future. The world, contrary to popular belief, is not
ending just because oil has broken US$30, and the Nasdaq is
down 12 per cent.
Old investors, like me, have seen it all before. Do not
panic and sell. You may see more losses, but panicking is never
a solid investment strategy.
(5) Don't bet on a reversal
Many investors bought energy
stocks when oil hit US$40 on the belief that there was no way
oil could drop to US$30. Well, here we are, well below US$30
and many are predicting US$10 as the next stop.
Likewise, Baytex Energy Corp. investors thought its stock
might turn around at $10 per share, yet this week it dropped
below $2. I do not know where oil is going to bottom out, and
neither do you. Just because something has dropped 50 per cent
does not mean it cannot drop another 75 per cent. Do not bet on
any recovery. Stick with a strategy and diversify.
Peter Hodson, CFA, is CEO of 5i Research Inc., an
independent research network providing conflict-free advice to
individual investors (www.5iresearch.ca).
