Bear mar­ket lessons

The Covington News - - Front page -

If you in­vest for many years, you’ll even­tu­ally en­counter both bull and bear mar­kets. Al­though you ob­vi­ously pre­fer see­ing the bull, you may ac­tu­ally learn more from the bear — and when it’s “hi­ber­nat­ing,” you can put th­ese lessons to good use in mak­ing in­vest­ment moves for the fu­ture.

Here are some of the key “bear mar­ket lessons” to con­sider:

• Pur­chase qual­ity in­vest­ments. A bear mar­ket tends to drag ev­ery­thing down with it. But qual­ity in­vest­ments — those with strong fun­da­men­tals and good prospects — have the po­ten­tial to bounce back quickly once the bear mar­ket ends. That’s why you’ll want to con­sider own­ing th­ese qual­ity ve­hi­cles in all in­vest­ment cli­mates. In fact, try to avoid own­ing in­vest­ments to­day that you wouldn’t want to own in a bear mar­ket to­mor­row.

• Main­tain re­al­is­tic ex­pec­ta­tions. Many in­vestors look back fondly at the mid-to-late 1990s, when we fre­quently ex­pe­ri­enced dou­ble-digit stock mar­ket re­turns. Un­for­tu­nately, th­ese re­sults “raised the bar” in terms of what in­vestors ex­pect — and th­ese el­e­vated ex­pec­ta­tions led to prob­lems for peo­ple whose long-term fi­nan­cial goals were based on overly op­ti­mistic pro­jec­tions. By an­tic­i­pat­ing more mod­est re­turns, you’ll be able to set more re­al­is­tic, achiev­able goals. At the same time, don’t be sur­prised at the re­cur­rence of bear mar­kets, which are a nor­mal part of the in­vest­ing process. •Know your risk tol­er­ance. If you find your­self los­ing sleep over the fate of your in­vest­ments in the midst of a bear mar­ket, you may need to re­view your risk tol­er­ance and ad­just your port­fo­lio ac­cord­ingly. But keep things in per­spec­tive. In­stead of fret­ting over daily or monthly down­turns, ask your­self this: “How much can I af­ford to lose and still meet my fi­nan­cial goals, such as achiev­ing a comfortable re­tire­ment?” You’ll come up with dif­fer­ent an­swers at dif­fer­ent stages of your life.

• Main­tain ad­e­quate liq­uid­ity. If you are plan­ning on cash­ing out a long-term in­vest­ment to pay for a ma­jor ex­pense, such as a down pay­ment on a home or col­lege tu­ition for a child, you could run into dif­fi­culty if a bear mar­ket is rag­ing and the value of your in­vest­ments have dropped. To avoid this prob­lem, main­tain a por­tion of your port­fo­lio in liq­uid in­vest­ments. Al­though th­ese ve­hi­cles won’t pro­vide you with a high re­turn, they of­fer greater preser­va­tion of prin­ci­pal — which is just what you need when you need the money now.

By fol­low­ing th­ese lessons, you can pre­pare your­self for a bear mar­ket — and help avoid get­ting “clawed” by it.

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