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Investing
Recovering from a bear hug
April 21, 2008
Brendon Lau, ShareAnalysis
Many share portfolios are probably looking pretty battered since our market took a steep dive, leaving investors feeling too bruised and afraid to make their next move. Unfortunately, not doing anything and just hoping for the best is often the worst strategy.
This is because your reluctance to plan your next move means you are squandering the opportunity to profit from the eventual recovery, while leaving your portfolio vulnerable to further losses should the credit crisis deepen.
If the "hold 'em and forget 'em" strategy is the least optimal option, it leaves investors two other choices - sell all or some of your shares now to consolidate cash and possibly offset some capital gains before the end of the tax year, or buy more to average down on some of your positions. Averaging down means to buy more of a stock at lower levels to reduce your cost base on that position. This way, the stock has to appreciate by a smaller amount before you return to profit.
Each of the two strategies has its pros and cons, and you can use the guidelines listed below to help you craft the best strategy for you.
Cash Position: The worst part about watching the share market recover is not being able to partake in the profits. If you did not sell any shares to build your cash position and have no money to channel back into the market, it could be a long time before your portfolio returns to the green. Always keep some of your "gun powder" dry, especially if you feel the market could be bottoming.
Top-Down View of the Market: This leads to the next question. Do you feel the market is more likely to recover or sink further? Why? It is important to keep yourself well informed about how the wider economy is tracking. If your portfolio contains stocks with overseas exposure, you need to be kept abreast on how those countries are doing too.
Stock/Sector Allocation: Not all sectors perform the same on the way down, and not all will perform the same on the way up. Have a look at how your investments are spread over the various sectors and reallocate funds as you see fit. Knowing what is happening on a macro-economic level is really helpful here. If you feel our share market is poised for another nosedive, be overweight on stocks/sectors that are less impacted by the credit crisis. If you think the worst is over, you could start to move more funds back into stocks/sectors that are likely to recover first.
Risk Tolerance: In all likelihood, your tolerance to risk has probably changed since the sub-prime mortgage meltdown. Leveraged investors in particular are unlikely to be able to absorb much more loss. If you cannot afford to lose more than you already have, it may be a signal that you should move your cash out of the market and into a risk-free investment and wait for better days.
Investment Objective: In many ways, this is related to risk. If your objective is to save for your retirement and you have many more working years left, you may be able to afford to wear more unrealised losses than someone who is in more urgent need of the money. Keeping your investment objectives clearly in focus will help you decide whether you should be buying or selling.
Brendon Lau is the editor of ShareAnalysis, a premium retail investment service offered by Aegis Equities Research. Click here for your free trial.
More articles from this edition of CompareShares:
Derivatives: How to insure your investment portfolio before it’s too late
Stocks: Broker Watch - stock buys in the construction sector
Investing: Recovering from a bear hug
Stocks: Stock of the week - Sally Malay
Technical Analysis: Using technical analysis to predict gold and silver prices
CFDs: Top ten CFD stocks for the week
Markets: US stocks surge as Google reaps profits
Wealth: Moscow too rich for Forbes' top 100 list
Resources: Resources boom to get second wind
Budget: Inflation tipped to hit 17-year high
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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