Could a bear market or stock market crash work in your favour?
If you have any money invested in a personal pension or stocks and shares ISA, you might be aware of bull and bear markets. You may on the other hand be blissfully oblivious. What is certain is that you’ll probably hear these terms used again and again by market analysts; especially in choppy markets.
Simply put, a bull market refers to a stock market on the rise. It is typified by a sustained increase in share prices such as we had between August 2011 and April 2015. In that period, the stock market rose by a whopping 40%! Behind this sustained market performance was strong economic forecasting from the commentators and experts. The danger with bull markets is that people start believing that the phenomena would continue forever. For example, most investors looking back from April 2011 to April 2014 would have seen an amazing return on a typical equity based investment. Expecting this to continue, they may have decided to take a higher risk than they normally would only have their fingers burnt later.
A bear market on the other hand is one that is in decline with share prices falling for a sustained period, resulting in a downward trend. A recent example would be most of the last 12 months, where the FTSE 100 share index fell from 7089 in April 2015 to 5707 in February 2016. That’s a fall of nearly 20% in one year! In that period, most people would have seen their stocks and shares ISAs and personal pensions fall in value. Bear markets can be dangerous because bad news sells newspapers and bear markets are perfect for this. With headlines like “Market Armageddon” and “Stocks and Shares Meltdown”, many investors who are in it for the long term may see this, panic and go defensive, or worse still, cash out.
So what to do? In my opinion, one of the worst things you can do is to keep a daily eye on your investments. This causes stress, and as a passenger you may get frustrated as there isn’t much you can do about the rises and falls in your investments. Worse still, you may find yourself taking the wheel in the belief that you could do a better job yourself! Unless you are an expert with nothing else to do with your life, this could lead to disaster.
So what to do? Patience is key with any long term investment. If you’ve invested in tracker funds which typically mirror the markets, you’ll just have to wait and ride out the storm. My advice for those in trackers is to cash out when the market is high. This in itself can be difficult; for when you’re making money, the natural instinct is to hold on to make even more!
Managed funds work differently. In my opinion, market timing isn’t as important when your fund is being managed by a fund manager. Their job is to watch the markets, take advantage and buy value stocks in bear markets or to sell out of overpriced holdings in bull markets. There is of course a price premium in having your fund managed by an expert. Some would say, “What price peace of mind?£
Either way, your independent financial adviser’s job is to help you sift through the myriad of options out there aiming to find you a decent compromise between charges and performance. With the right team behind you, you could have a team of bulls and bears pulling in the right direction – wouldn’t that be nice?
Note: The value of investments and the income derived from them can fall as well as rise.
