At the best of times the share market is a volatile creature, it can drop in a matter of moments and wipe out billions of capitalization value… and then create billions again a day later.
The typical investors approach to investing is to adopt a bullish approach; usually driven by share prices rising and confidence being high. That is, they chase the high flying performers. Recently markets have generally been pretty positive, which encourages that mindset, but there is turmoil on the international political scene.
It may be prudent to adopt a bearish mindset instead. A bear market is one in which prices are dropping and there is a negative feel to the economy. This decreases investing activity, which actually creates a self fulfilling prophecy. The market goes down because people expected it to, and then they took their money out and made it go down further…and on it goes.
The reasons for perhaps considering a more conservative mindset are:
Unfortunately, downturns come with almost no warning and happen fast. When they do happen retail investors are usually the last to know and the last to be able to capitalize upon opportunities. The traders and institutions always get there first, so it is tough to compete with them on speed to market transactions when things are volatile.
- Risk Reduction Strategies
The most common reaction of investors when the market drops is to look at what alternative investments are available. So most people take the “paper loss” from the dip and turn it into an actual capital loss by pulling out of the market in order to find something else which appears to offer a healthier return. While it is a tough thing to do, usually the most important thing in any share market downturn for the long term investor is to stay invested; don’t realize the capital loss by taking undervalued share investments and trying to turn them into cash. Actually, you reduce your long-term risk of capital loss by staying invested in the share market rather than heading for cash.
- Keep Some Money in Cash
Cash is the obvious and safe alternative to just about anything, especially when other investments start to lose value or underperform. Cash is a lower risk, safer approach which allows you time to assess the market and your options. If you have a cash buffer you can do this calmly and with all the necessary information in front of you rather than being swept up with what others are doing or following your emotions. Having cash available also means that you are in the best position to buy the low priced stock as it hits the market. It also avoids you having to worry about whether to hold shares or sell them low and make a loss; in order to get some of your funds back.
- Share Fundamentals
Normal investment times make forward earnings and the growth potential of shares a good place to invest. However, when the market starts to drop these types of investment, may not appear as good as they were. This is simply because of a loss of confidence; the lack of people investing in them creates an uncertain environment. The underlying businesses that you are investing in however are, more often than not, continuing to do quite well and performing and earning as expected.
In times of uncertainty it is often best to adopt a bearish mindset where volatility and market corrections are to be expected, and do in fact present opportunity to invest further in good but undervalued assets.
- Last updated on .