Bear market investing

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6. Bear market investment options: timing the market

When the stock market moves from a bull to bear phase, there are a number of ways you can respond. The most radical is to try to 'time the market' - to sell your shares at the top of the bull market, and go back into shares when they've hit rock bottom.

If you manage to do this, and your stock selection is good, you'll make big profits. No argument about that. Where there is argument is on whether you should attempt such a feat in the first place.

AGAINST - The 'Buy-and-Hold' School

1. Market timing is very difficult. Fund managers who spend their lives in daily contact with the markets can't do it. How on earth can you?
2. Time spent trying to time the market is better spent analysing companies and finding good stocks to hold for the long term.
3. It's safer, and more profitable in the long term to stay in the market and ride out the dips.

Ralph Wanger, one of the proponents of the 'stay in' view, cites a study which showed that if you were out of the market for a critical 7 per cent of the 780 months from 1926 to 1990, you would have earned absolutely nothing from sixty-four years of investing. And the reason? Simply that gains in bull markets are often concentrated in very short time periods.

There's also the ever-present danger of selling out of a bull market too early. If you exit on the grounds that shares are overvalued, you may find yourself sitting on the sidelines as prices continue to rise. It will be little consolation that you were in fact right.

FOR - The 'Cut-and-Run' School

1. Buy and hold isn't all it's cracked up to be. If you'd bought at the top of the US market in 1929 and held on through thick and thin, your shares would not have recovered their 1929 value til 1954. That's 25 years of zero growth! [Source: The Bear Book]
2. If you drip feed your money into the market over a period of years, catching the troughs and peaks, buy and hold may work. If you invest a lump sum in one go, and that investment happens to be made at the top of a bull market just before a bear market, holding on can be disastrous.
3. You may not have the time to buy and hold! If you're 60, can you afford to wait 10 years for equities to recover.

Who's right? Much will depend on the way in which you have accumulated your share portfolio, and on the severity and duration of the bear market. If you bought your shares over a period of time, and the bear market is short, you can probably afford to stay invested. If you bought near the top of the bull market in one go, and the bear market is severe and long-lasting, you'd be better off out.

The trouble is, there's no way of knowing in advance whether a bear market is going to be drawn-out like the one in the 1970s, or short like the 1987 crash.

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
• Secrets For Profiting In Bull And Bear Markets
• The Great Crash, 1929