A bear market, meaning a down market, is named for how a bear fights, slashing his paws down. While that might be a dramatic image, many investors who find their portfolio ripped to shreds can identify with the devastating feeling the image conjures.
However, as coCredit: http://www.freedigitalphotos.net/images/view_photog.php?photogid=721unterintuitive as it may be, a bear market may be the best type of market for a young investor. This is because for those folks striving to grow their savings, it’s better to have a bear market at the beginning of their accumulation stage rather than at the end. If an investor buys stocks during a down market, then, hopefully when the market rebounds, his portfolio will increase proportionately.
No one has prophecy
I’m frequently asked if I think the market will rebound to its previous high. Instead of answering the question, I ask a different question, “How are the market’s movements affecting your financial plan?” While it may be emotionally difficult to recover from the last year’s market’s slide, if your financial plan was sound and is still appropriate, things should eventually work themselves out. The question is: how and when will the “eventually” take place?
If you are closer to retirement, there is much less room to maneuver. Since there is less time to recover a loss, and less tolerance for increased risk in your remaining funds, the question becomes how to protect your principal best. You need to protect your principal both from losses and against inflation. Perhaps postponing retirement or increasing savings can help your bottom line. Other times, reallocating your assets into income-producing streams might do the trick.
If you are further away from retirement, there are more options. Without embracing too much risk, there may be suitable investments that can boost your nest egg in time to meet your goals. Since time is on your side, you may be able to invest in high risk/high potential instruments in order to meet your target. If your investments are too conservative, they might not earn enough to retain their real value against inflation.
In both scenarios, asset allocation is the key. Make sure your portfolio’s actual allocation reflects the allocation set in your financial plan. Chances are, the market’s moves moved your portfolio allocation. Though it may be difficult to align the reality with the ideal, doing so is perhaps the single best move you can make for your fiscal future.
For more information on asset allocation, read A Guide to Juggling Your Investments and Your Life.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.