Friday, July 14th, 2006
10 ways to handle tough markets, part 1
1. Focus on the opportunities
Remember, from every bear market or correction springs a rally. They also create great opportunities, with good growth companies sometimes sold off to ridiculous levels. Tough markets have a tendency to highlight the best performers. Good stocks will show great relative strength and hold up amid the carnage. These are the stocks that will surge when the market turns. Take the time to look for these future leaders.
2. Learn bear-market strategies.
While we’re all primarily growth investors and spend most time long, markets do fall. Invest some time learning how to exploit, or avoid, bear markets. For individuals this could involve learning to short, using put options, investing in bear funds, or using market timing to move to cash. Fund managers can employ various forms of hedging. Rather than fearing bear markets, use them as allies or step aside. This will stop you fighting them and causing serious damage to your account and mental wellbeing.
3. Scenario analysis
The market’s down, but what if it keeps crashing? Doing basic ‘what if’ scenarios will help you prepare for the worst. When the market is falling, most people hope for a bounce. But what if it crashes? Remember, the unthinkable does happen. If you’ve thought through all possible scenarios and their consequences then you’ll be better prepared if the worst does eventuate.
4. Use it to increase your resilience and toughness
Market corrections happen all the time. You just have to get used to it and tough them out. If you’re physically and mentally out of shape, then the stress of corrections will be made worse. One resource to help you build up your resilience is The Power of Full Engagement : Managing Energy, Not Time, Is the Key to High Performance and Personal Renewal by Jim Loehr and Tony Schwartz. It will teach you to manage your energy by eating, sleeping, resting and thinking well.
5. Experience your emotions
Ed Seykota encourages members of his Trading Tribe to experience their emotions. Even if you’re not a member of Ed’s tribe, this can still be a good idea. Don’t try and repress your discomfort during corrections or bear markets or you’ll end up playing out the drama in other parts of your life … like fighting with your partner! This can be as simple as sitting at your computer as you perform analysis or review your portfolio and going through your emotions and physical reactions and focusing on them and recognizing them.
Read part 2 of how to handle tough markets here
Leave a comment below telling us how you as a growth investor handle falling markets.
Word Count: 428. This entry was posted on Friday, July 14th, 2006 at 5:42 pm and is filed under Investing psychology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
