Bear vs. bull market

Don’t lose your head, or money in a bear market

The number one rule in investment, according to stock picker, Warren Buffet, is to never lose money. This, however, doesn’t mean you should sell your investment holdings the moment they start heading south. But what happens when things are heading south and it looks like it won’t stop anytime soon?

That’s the loose definition of a bear market – a bear market describes a widespread and sustained decline in the prices of stocks or other assets over a given period of time.

The phrase comes from how a bear attacks, which is mostly out of fear as it swipes at its prey with its claws in a downward motion. This swooping down movement is the basis for the name “bear market”.

Market prices for any asset – gold, bonds, homes, real estate – fluctuate constantly. When they fall steeply over time, the condition is described as a bear market. Generally, a price decline of 20% or more from a peak that lasts for two months or more is the threshold for a bear market.

So how can Kenyans survive this tormenting ride, which to be honest, leaves some running around applying probably the most self-destructing strategies while trying to save their money at the Nairobi Securities Exchange (NSE)?

Here are strategies on how you can manage your investments at the Exchange especially when things aren’t looking so good.

Play it cool

Staying calm and keeping your fears in check is the first and what is believed to be “official” remedy of fighting a bear market. If you are able to put your fears and emotions in check, you’ll make good decisions in the long run.

Play dead

You are fighting a bear and just like how you fight a real one (by playing dead) you need to unleash this trick on bear markets. As always, fighting back would be very dangerous, especially, if you skipped the first step mentioned above.

By staying calm and not making any sudden moves, you’ll save yourself from becoming a bear’s lunch. Playing dead in financial terms means putting a larger portion of your portfolio in equivalents of regulated products like money markets (unit trusts), treasury bills and fixed deposits, alongside other instruments with high liquidity and short maturities.

Diversification

Your primary school teacher even knows this and always told you before handing in your end-term results – never put all your eggs in one basket. Having a percentage of your portfolio spread among stocks, bonds, cash, and alternative assets is the core of diversification. 

Investors should create deeper and more broadly diversified portfolios by owning a large number of investments in more than one asset class, thus reducing unsystematic risks. This way, even keeping a calm head will be easy.

Invest only what you can afford to lose

Just like gambling, don’t put an amount you can’t afford to lose. Put the money you will be okay watching evaporate. This is a golden rule of investment that a majority of Kenyans forget.

There is a natural human tendency to want to overreach, put in more money than you can afford, and go for a huge payout. This trait tends to become magnified in the face of losses. In short, it normally ends in tears.

The Sunk Cost Fallacy (belief that you have invested too much to walk away) is real and a reason why many end up increasing their losses where they could have just walked away.

Talk to an investor

Let someone who understands the business guide you. It is not about talking to your uncle who recently bought, for example, Safaricom or CIC shares after unexpectedly getting some rather huge amount of money.

Talk to an investor with a legitimate, documented track recording showing he/she understands the business.  – Market Cap Trainers