Cents and Sensibility
Guy Steele
You might think there's nothing positive in a stock market that has slumped for a long time. After all, the value of your holdings is down, and you're having a hard time seeing where to invest. And yet, even a long bear market can teach investors some valuable lessons -- if you know where to find them. Important lessons to be
learned in a bear marketHere are a few to consider:
>> Stay in the market. When prices keep falling, many people try to "trade their way to success" -- or they get out of the market altogether. But constant stock trading is expensive and usually ineffective. Furthermore, it's hard to develop a solid, disciplined investment strategy if you're always making trades based on short-term considerations. And if you jump out of the market, you could miss the early stages of a recovery. It's generally a good idea to stay invested rather than try to time the short-term ups and downs of the market.
>> Know your own risk tolerance. We all have different investment personalities. Some of us are willing to take more risk in exchange for potentially higher returns. Others accept lower returns in exchange for greater stability of principal. Most investors are somewhere in-between. A bear market provides a good opportunity to gauge whether your risk tolerance is really what you thought it was.
>> Diversify. You can't totally elude a bear market. But you can blunt its impact by diversifying across a range of investments -- stocks, bonds, government securities, money market accounts and others. If all your investments are alike, they may all move in the same direction at the same time -- a problem in a down market.
>> Be "price-conscious." Even during a prolonged market downturn, some stocks can still be expensive. Before you buy any stock, make sure its price is supported by solid fundamentals -- such as a strong track record of earnings. You need look back no further than the bursting of the technology bubble to find an example of stock prices that could not be sustained due to low -- or non-existent -- profits.
The upside of a bear market is that some high-quality stocks are attractively priced, because a bear market tends to drag everything down. Eventually, good stocks are likely to bounce back. The best time to buy them is now.
Ultimately, a bear market can be quite educational. You'll become acquainted -- or reacquainted -- with the importance of finding attractively priced companies that offer solid business plans, competitive products and far-sighted management. You'll gain a greater appreciation of just how much risk you can handle -- and how much discipline you can impose upon yourself. These are important insights, and they'll serve you well today and long into the future.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com