How To Tame The Big Bad Bear

0

3/13/07

Is the next “Bear Market” just around the corner? Was the recent market correction a harbinger of things to come? No one can know the answer to these questions, but there are a number of steps each of us can take to prepare for the next Bear which, sooner or later, is surely on the way.

The preparation should begin now, whether you are a new investor, or have already amassed a sizeable portfolio. The objective is to protect it from the ravages of the bear as it emerges from its four year slumber.

The first step is to evaluate yourself, your financial objectives, and your emotional and psychological tolerance for risk, (your account values going south in a hurry), and invest accordingly. Investing accordingly simply means building a portfolio that reflects your risk tolerance and financial objectives. If you are a relatively conservative investor then your portfolio should reflect that, whereas if you are a bona fide risk taker, then your portfolio will be designed to reach for higher returns.

Next, build a portfolio from the ground up, much like you would build your home. For example, our strategy is to build portfolios with a solid foundation of consistently performing hybrid mutual funds. Hybrids are funds composed of stocks and bonds, and the ones we use have demonstrated consistent performance over a number of years, in both good markets and bad.

Next, we layer the portfolio with a healthy dose of what we call “All Weather” stock funds, again, funds that have performed well in Bull and Bear markets. These funds tend to practice a value management strategy, buying under priced stocks in the marketplace. Many of these funds exhibit strategies similar to legendary manager Warren Buffet, the worlds most well known and respected value strategist.

The preceding describes how we build portfolios for the more conservative investor, whereas additional steps are taken for those willing and able to accept a higher degree of risk.

For those able to accept the additional risks involved, we seek to add value and capture the best performing market sectors by adding Exchange Traded Funds (ETFs) to the portfolio. These ETFs cover the range of economic sectors, i.e. energy, metals, real estate, health care, utilities etc., and/or regions of the world, i.e. Asia, Europe, Latin America, and even individual nations, Japan, Spain, Germany, China etc.

And finally, an additional technique that can be used by everyone is the “contrarian” fund. They come in many flavors but the two we use are the contrarian mutual funds and exchange traded funds. Contrarian funds are designed to do the opposite of what the market is doing. In actual practice we will buy this type of fund when a serious market correction is underway, which allows us to protect the value of the portfolio. Our “All Weather” funds described above tend to give ground grudgingly, and some have even gone up in past market corrections, while at the same time our contrarian funds are actually going up in value during the market decline, as they are designed to do. The objective is to be able to hold our investments through the correction and protect our capital at the same time.

Every situation is unique of course, and each investment portfolio should be compatible with ones own goals, financial needs, and risk tolerance.

Above all, never forget the two most important rules of successful investing. One, never ever suffer large losses, and two, never forget rule number one.

Comments are closed.