Investment Research Group
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At times like this, the temptation is to panic and sell to minimise your losses. However, it is important to remember that most people do not intend to sell their shares this week, this month or even this year. Therefore, short-term price volatility should not cause people to panic.
Of greater concern is when a market stops having a correction and starts a sustained decline - the so-called 'bear market'. This is a steady decline that seems never to end, as was experienced in the 1970s bear market slide, that went on for seven years.
However, there are ways to minimise losses and even profit during such periods. US commentator Carrie Coghill warns that trying to time market swings is "a classic investor mistake during bear markets".
So is holding through thick and thin and refusing to make portfolio changes. Another investor mistake is converting all or most assets into cash as safety measure. This may seem like a prudent move in the short-term but over time the value of that cash can be whittled away by taxes and inflation.
Also, holding cash forces you to decide the exact moment to get back into the market. Since picking the bottom of a market is virtually impossible, you run the risk of missing out on the next recovery.
The US market has experienced 11 bear markets since World War II. The average market decline has been just over 20%, an ugly figure. But one month after the market bottomed out, the average recovery was over 10%.
After three months, the average recovery was 14.7%; six months after bottom, the average recovery was 23%.
Coghill offers the following tips for investing during a bear market: Own quality. Don't be afraid to invest in struggling sectors, but invest in the best companies in those sectors.
If you're investing for the long-term, you want to employ a system of buying low. Reallocate your portfolio regularly to reflect an emphasis on diversification and long-range thinking.
Don't get greedy. As the market recovers, take profits on a systematic basis. "If the market keeps rising as you engage in rational profittaking, so what? When you're happy with your results, it doesn't matter what the broader market is doing," he says.
"A successful asset allocation strategy requires a commitment to keep a designated percentage of assets invested in their respective classes, regardless of the current performance of those classes. Inevitably, some asset classes and subclasses perform better than others over the short term. But today's underperformers typically are tomorrow's stars."
The last time local markets had a sustained decline was 2002, when it seemed that they would never recover and even blue chip icons like AMP were on their knees. But the simple strategy of buying the best blue chip shares in that year delivered spectacular results over time.
If you own good shares that the market has sold down, and are prepared to be patient, then you could do worse than averaging down. That is, buy more of the shares you own that are falling, in order to reduce your entry level price in that stock.
