In­vest DIY: How to re­act to a bear

Ex­pe­ri­enc­ing your first bear mar­ket? Pan­ick­ing? That won’t help you much. In­vest­ment ex­pert Si­mon Brown has ex­pe­ri­enced fall­ing mar­kets be­fore and pro­vides tips to guide you through a bear.

Finweek English Edition - - Contents - ed­i­to­rial@fin­week.co.za

as I write this, a week or so ahead of you read­ing it, our lo­cal Top40 in­dex is off 20% from the in­tra-day highs of mid-Novem­ber 2017*. That is of­fi­cially a bear mar­ket, which is mea­sured as a 20% draw­down from a high. If you only started in­vest­ing post the global mar­ket melt­down of 2008/09, wel­come to your first bear mar­ket. Don’t panic.

Fall­ing mar­kets never feel nice – your in­vest­ments are los­ing value and you’re scared to put new money into the mar­ket in case things fall still lower. And, if enough peo­ple feel this way, the buy­ers largely dis­ap­pear and mar­kets head even lower.

The re­al­ity is that mar­ket sell-offs are usu­ally a com­mon event. But the last decade since the credit cri­sis has not been a nor­mal mar­ket – fed by record-low in­ter­est rates (neg­a­tive in some quar­ters) and mas­sive quan­ti­ta­tive eas­ing (gov­ern­ment buy­ing of bonds to flood mar­kets with cash). Gen­er­ally, a mar­ket will ex­pe­ri­ence a 10% draw­down ev­ery cou­ple of years, with a 10% to 15% draw­down ev­ery five years, and a +20% draw­down ev­ery five to ten years.

The re­ally big hit­ters – as we saw in 2008/09, with global mar­kets off be­tween 40% and 50% – are rarer events, with only two in the last 100 years (the pre­vi­ous was 1929).

So, what we’re see­ing play out in our lo­cal, and other global, mar­kets is some­thing that should be fairly com­mon, al­beit not for the last decade. New­bies to the mar­ket have never seen any­thing like it – and are pan­ick­ing in some cases. But, as I al­ways say, while pan­ick­ing is some­times use­ful, it’s only re­ally use­ful in a cri­sis – and a gen­tle bear mar­ket is not a cri­sis.

Im­por­tant to note about this bear mar­ket is that it has not been driven by a cri­sis. As such, it’s very un­likely that we’ll see an­other 40% sell-off. Crises are mostly driven by out-of-con­trol debt and, aside from gov­ern­ments around the world, we’re not see­ing ex­ces­sive cor­po­rate or per­sonal debt lev­els. More­over, gov­ern­ment debt is man­age­able as they con­trol the print­ing presses. Not a great so­lu­tion, but it works.

That said, I am also not say­ing the bear is over. We could go lower, or per­haps ex­pe­ri­ence an­other side­ways pe­riod of go­ing nowhere slowly – as we’ve seen for much of the last five years. I sus­pect the driver here is go­ing to be US mar­kets that are still in a bull phase, even af­ter the re­cent sell-off. If those mar­kets con­tinue to sell off, it would very likely re­sult in us head­ing lower.

So, what’s an in­vestor to do?

The same as al­ways: Con­tinue with your ex­change-traded fund (ETF) pur­chases and buy the qual­ity shares, mak­ing sure you leave the dogs alone. If you’re wor­ried the qual­ity may get still cheaper – and it may – you can place some cheeky bids be­low cur­rent lev­els. Our mar­ket is very cheap on al­most any val­u­a­tion met­ric, but, as al­ways, I am pretty much fully in­vested. I have some buy or­ders in on stocks I like and, as I have pre­vi­ously writ­ten, I am avoid­ing small- and mid-cap stocks.

So, sit back and take in your first bear mar­ket. Re­mem­ber the de­tails so you can re­gale your grand­kids one day when they ask about the great bear of 2018. Ex­cept, they prob­a­bly won’t be ask­ing about the 2018 bear be­cause on long-term charts we can hardly even see these bears. In­stead, you should re­lax and re­mem­ber bear mar­kets hap­pen, but they also pass in time. (Also see p.22.)

*By the time I had fin­ished writ­ing the col­umn the mar­ket was green. ■

Fall­ing mar­kets never feel nice – your in­vest­ments are los­ing value and you’re scared to put new money into the mar­ket in case things fall still lower.

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