5 tips for investing in a bear market
Update: In our recent webinar: Investing in Uncertain Times upon some of these topics in more detail – if you haven’t watched it yet, feel free to tune in here
When it comes to investing in a time of uncertainty, it is important to take a balanced approach and focus on the key factors we can have an element of control over.
Here are 5 key things to focus on when investing in a bear market.
In this chart,* the light grey bars represent the number of US-domiciled equity and fixed income funds in operation during the past 20 years. These funds compose the beginning universe of that period. The dark grey areas show the percentage of equity and fixed income funds that survived the 20-year period. The blue and green bars show the smaller percentage of equity and fixed income funds that survived and outperformed their respective benchmarks during the period.
1. Stop trying to out-think the market
Some fund managers believe that they can identify ‘mispriced’ securities and convert that knowledge into higher returns. This is disproved, however, by the large number of mutual funds that have underperformed their benchmarks. There are two main reasons that funds don’t survive and that is lack of interest from investors and poor performance. According to research by Dimensional the odds are stacked against mutual funds that attempt to outguess the market.
Picking the right lane is a stressful guessing game. The future is uncertain, but prices will adjust accordingly. This doesn’t mean that a price is always right—there’s no way to prove that. But investors can accept the market price as the best estimate of actual value. If you don’t believe that market prices are good estimates—if you believe that the market has it wrong—you are pitting your beliefs and hunches against the collective knowledge of all market participants.
Likewise, anticipating the movement of the market can add anxiety and undue risk.
2. Avoid chasing past performance
It’s tempting for some investors to invest based on past returns, however research shows that mutual funds in the top 25% during the past 5 years returns, did not manage to retain a top percentile ranking for one-year returns in the year that followed, highlighting that past performance is not always a great indicator of future success.
A lack of persistence casts further doubt on the ability of managers to consistently gain an informational advantage on the market. Some fund managers might be better than others, but track records alone may not provide enough insight to identify management skill. Stock and bond returns contain a lot of noise, and impressive track records may result from good luck. The assumption that strong past performance will continue often proves faulty, leaving many investors disappointed.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results.
This chart* shows that among equity funds ranked in the top quartile based on previous five-year returns, a minority also ranked in the top quartile of returns in the following five-year period.
International investing involves special risks, such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Past performance is not a guarantee of future results. Diversification neither assures a profit nor guarantees against loss in a declining market.
Number of holdings and countries for the MSCI United Kingdom Investable Market Index (IMI) and MSCI ACWI (All Country World Index) Investable Market Index (IMI) as at 31 December 2020. MSCI data © MSCI 2021, all rights reserved.
3. Practice smart diversification
Many people will choose to invest in their home stock market only, believing they are diversifying by choosing UK stocks and mutual funds. However, investing within your home market may not be enough.
Considering global diversification could broaden your investment portfolio greatly, and holding securities over several market segments can help to manage your overall risk.
This graphic on the left offers a conceptual comparison of investing only in the UK market, as represented by the MSCI United Kingdom Investable Market Index (IMI), and structuring a globally diversified portfolio that holds assets in markets around the world, as represented by the MSCI ACWI Investable Market Index (IMI). For the global portfolio, holding thousands of stocks across the world’s developed and emerging market countries broadens one’s investment universe.
A diversified portfolio should be structured to hold multiple asset classes that represent different market areas across the world.
4. Manage your emotions
Daily market news and commentary can challenge your investment discipline. Some messages can stir anxiety while others may tempt you to chase the next investment fad.
In my recent webinar, I suggested to look beyond the headlines, considering the source and maintain a long-term perspective.
Feelings are good servants but disastrous masters. People may struggle to separate their emotions from their investment decisions and following a reactive cycle of excessive optimism and fear may lead to poor decisions at the worst times.
A disciplined investor will look beyond the concerns of today to the long-term growth of the markets, so managing emotions is vital for your long term goals.
For illustration purposes only
5. Focus on what you can control
There are 2 things that are certain, taxes and death. Beyond that we have little to no control in what will happen in our own lives or in world events. What we do have control over, however is our responses to those events. and our resulting decisions.
Firstly, we can control our objectives by reviewing our current plan. Are our objectives the same as they were 5, 10 years ago. Looking at those objectives, do they need tweaking? Does our investments strategy have the same parameters? Does our risk profile need to change? Have we considered all ‘what if’ scenarios? Preparing for those situations now, allows us to take some control back so, if things do not go to our plan down the line, we will have made decisions with a clarity and critical thinking that will allow us to remain disciplined and stay the course.
All this considered, your financial adviser can serve to offer you expertise and guidance which will further improve your investment experience. There are many advantages to seeking financial advice from an expert, including creating an investment plan, creating a structured portfolio, guidance on global diversification, managing your expenses, turnover and subsequent taxes as well as support in staying disciplined through the inevitable peaks and troughs as the market dips and shifts.
If any of the above has sparked any questions or you are interested in finding out more about investing, please don’t hesitate to get in touch with us at email@example.com
*There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results.
The sample includes funds at the beginning of the 20-year period ending December 31, 2020. Each fund is evaluated relative to its primary prospectus benchmark. Survivors are funds that had returns for every month in the sample period. Winners are funds that survived and outperformed their benchmark over the period. Where the full series of primary prospectus benchmark returns is unavailable, non-Dimensional funds are instead evaluated relative to their Morningstar category index. US-domiciled, non-Dimensional open-end mutual fund data provided by Morningstar. Equity fund sample includes the following Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Global Real Estate, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Growth, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Real Estate, Small Blend, Small Growth, Small Value, World Large Stock, and World Small/Mid Stock. Fixed income fund sample includes the following Morningstar historical categories: Corporate Bond, High Yield Bond, Inflation-Protected Bond, Intermediate Core Bond, Intermediate Core-Plus Bond, Intermediate Government, Long Government, Muni California Intermediate, Muni California Long, Muni Massachusetts, Muni Minnesota, Muni National Intermediate, Muni National Long, Muni National Short, Muni New Jersey, Muni New York Intermediate, Muni New York Long, Muni Ohio, Muni Pennsylvania, Muni Single State Intermediate, Muni Single State Long, Muni Single State Short, Muni Target Maturity, Short Government, Short-Term Bond, Target Maturity, Ultrashort Bond, World Bond, and World Bond-USD Hedged. See Dimensional’s Mutual Fund Landscape 2021 for more detail. Index data provided by Bloomberg, MSCI, Russell, FTSE Fixed Income LLC, and S&P Dow Jones Indices LLC. Bloomberg data provided by Bloomberg. MSCI data © MSCI 2021, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. FTSE fixed income indices © 2021 FTSE Fixed Income LLC. All rights reserved. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio.
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