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Bear markets: a survival guide

By Sam Instone - January 25, 2016

[Estimated time to read: 3 minutes]

Screens are red, and getting redder: oil is cheaper by the hour, the talking heads at Davos are generating industrial amounts of hot air…and equity markets across the world keep going down. For all of us who are invested- for our pensions, university savings or whatever- these are worrying times.

So read on to learn what you ought to worry about, and what we think is 'normal', volatility all investors should inspect.

First- what is a Bear market?Bear_markets.jpg

Generally, it is a condition in which markets have fallen 20% or more from their peak, over a prolonged period. More importantly, it describes how widespread pessimism causes negative sentiment to become overwhelming and self-fulfilling. Good news is ignored, and bad news is given great weight. Catastrophe feels imminent and the hysteria inflames everyone. It seems impossible markets will ever rise again. As the great Gaul Vitalstatistix feared, the sky may well be falling on our heads.

Knowing what to do can make the difference between preserving your capital and losing a fortune. The key is to avoid joining the panic. In fact, one of the signs of the 'bottom' in a bear market is retail investors- people like you and me- giving in to the panic and selling everything.  Historically, this is when buyers step in and begin to drive prices up again.

It's really important, before deciding to buy, sell or simply to hold on, to think about what is happening. We wrote before about the major themes in current markets (Iran and China).  Market bears (i.e., people who think prices should continue to fall) point to bad economic news from China, collapsing commodity markets, and a slowdown in earnings from major companies across the world. 

More optimistic investors see the world differently. They think China's growth continues to be impressive and resilient, low oil prices will soon turn into a huge boost for consumers, and valuations of companies are undemanding. 

It's possible, if counter-intuitive, that both optimists and pessimists are correct: China's slowdown is indeed worrying, but growth there remains robust enough to support the global economy.  What is striking in a Bear market is that the negative news has much greater impact than the positive.

It's also possible the market has already accounted for much of the bad news- and recent falls in markets have overdone the response.  If that's the case, markets should rally from here and investors who have taken advantage of depressed levels will profit handsomely.  The problem with current conditions is Bearish emotions are so dominant that few investors are brave enough to argue about the fundamentals underpinning stock prices.

So what?

Here at AES International, we are wise enough to know there are some things we can’t know. We don’t know what will happen tomorrow or next week. 

We understand, because we speak to clients every day, that many investors are afraid. Our main view is markets have over-reacted. 

This doesn’t mean we are brave enough to say when, or how far, markets will rally. But it means we continue to believe investors will be rewarded for taking risk. Like everyone, we wish we had called the top of the market last summer. But the 20% gap in valuations since then is too much. We believe markets will stay volatile, as we pointed out last August. 

We believe equities are attractive, and we think a medium term view will reward investors who have the liquidity, and the courage, to step up.

If you are worried about your investments, why not get in touch today or download our ebook, An introduction to investment risk.