Bear market investing

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19. Bear-proofing - pound cost averaging

Another tried and tested technique for surviving a bear market, especially if you begin the process some way into the decline, is to consider buying the same stocks regularly, investing small equal money amounts each time.

This technique is known as pound (or dollar) cost averaging. The principle is simple:

• Select a list of stocks you are prepared to buy and hold for the long term.
• Look around for a broker that offers you low dealing costs in exchange for buying a package of stocks on a regular basis.
• Invest the same money amount each month or each quarter.

The number of shares you acquire each time you invest your fixed amount of money will depend on whether share prices are high or low at the time:

• When share prices are low, your monthly investment will buy you a higher number of shares in the companies concerned.
• When prices are higher, it will buy you fewer shares.

Overall, you will have acquired your shares at an average price for the period concerned. If that period coincides with a bear market, your average book cost should be eventually overtaken when the new bull market begins.

Another way of achieving this is to pick a well managed general investment trust, an index tracking mutual fund or an exchange traded fund that tracks a broad market index that operates a savings scheme.

The latter two options avoid the specific risk that comes from buying shares in individual companies that may do less well than the market as a whole over the longer term. If you are confident in your stock picking skills, however, picking half a dozen solid stocks may be the better route.

Index trackers have the drawback that you are investing in the good and bad performers in the index alike.

1. A word on bears 2. What is a bear market? 3. Why do bear markets happen? 4. How to spot the appearance of a bear market 5. How bear markets end 6. Bear market investment options: timing the market 7. Bear market investment options: the asset classes 8. Stocks: blue chips vs small caps 9. Bonds 10. Property and gold 11. Cash 12. Stocks: general principles 13. Bear-proofing - low 'beta' stocks 14. Bear-proofing - high yield shares 15. Bear-proofing - sectors that historically do well in bear markets 16. Bear-proofing - sectors that historically do badly in bear markets 17. Bear-proofing - key ratios for selecting stocks 18. Bear-proofing - investing in stocks you know and can support 19. Bear-proofing - pound cost averaging 20. Recognising the revival - a check list 21. Conclusion

• Survive and Profit in Ferocious Markets - the Bear Book
• Stan Weinstein's Secrets for Profiting in Bull and Bear Markets
• The Great Crash, 1929