Hints on Handling Down Markets
August 14, 2008
Keep Focus on Long-Term Strategy, Not Short-Term Conditions
Bear markets are never easy to endure. They elicit many emotional responses and often lead to counterproductive behavior as we feel we must “do something.” However, with correctly assessed risk tolerance and an appropriate asset allocation policy implemented, the best thing to do is ride it out. Nevertheless, sometimes this is easier said than done. For this reason, here are some hints that can help investors handle these difficult markets.
1. Focus your efforts on the long-term. Tune out the short-term noise. Accept the fact that markets will fluctuate, but that long-term investors have been handsomely rewarded over time for taking equity risk.
2. Use these environments to validate your risk tolerance and ensure that your asset mix and diversification are appropriate. At the same time, resist the temptation to conclude in a down market that your risk tolerance is lower than it really is — just as you should resist concluding that it’s higher in a bull market!
3. Tune out the market commentators and “sages.” Focus on your long-term strategy and stick to it. No one knows what the market will do in the short term and for every bullish sage there’s one who is bearish. By focusing on short-term forecasts, you will only be tempted to act counter to your strategy, and probably in an emotional manner.
4. Focus on the forest rather than the trees. If you must look at your returns, focus on your total portfolio, rather than each segment. If it is well diversified across asset classes, it has likely withstood the downturn reasonably well. It is easy to spend an inordinate amount of time on the major losers, rather than the big picture.
5. Remember that your asset mix was designed to reflect both bull and bear markets.
6. This too will pass. Resist the tendency to extrapolate the present. Remember that the expected return on stocks is higher after a bear market than it was before it!
7. Stay disciplined and resist the temptation to react to short-term fluctuations. If you must react, do it in very small doses.
8. For younger investors who are new investors in the markets, remember that down markets provide the opportunity to buy shares at lower prices.
9. For older investors who rely on markets to provide retirement income, spend your time confirming your asset mix and diversification and make appropriate adjustments on that basis.
10. For your health and well being, manage your stress. This means exercising to reduce stress and eating and sleeping right. It also helps to count your blessings and spend extra time with your loved ones. It is amazing how this helps keep perspective when the times are tough.
This information was provided by Russell Investments Canada website.
Fall 2009 Newsletter - Now Available
August 7, 2008
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