Reactions to turbulent and bear markets vary by investor.
Some are unfazed by large drops in stock prices, and even view them as buying opportunities (“Buffett-like investors”).
Others curtail their stock holdings when the market incurs a steep drop, but don’t completely pull out of stocks (“nervous investors”).
There also are many who get out of stocks completely during a bear market (“panic investors”) out of fear of incurring further losses.
Given wide variances in how each investor reacts to bear markets— the aggregate data does imply, however, that Buffett-like investors are likely a comparatively small group. More people probably fall into the nervous and panic investor groups. This is not surprising, given the human inclination to be risk-averse.
As Daniel Kahneman and Amos Tversky demonstrated with “prospect theory,” we feel the pain of losses much more than we derive pleasure from gains.
Compounding matters, we humans commonly engage in hyperbolic discounting, which means we place greater value on rewards received sooner rather than later.
When the market falls and stocks are sold, we see the immediate value of avoiding further losses.
What isn’t considered are the potential future gains forfeited by not continuing to stick with stocks or, better yet, by rebalancing and allocating more money into stocks.
Some are unfazed by large drops in stock prices, and even view them as buying opportunities (“Buffett-like investors”).
Others curtail their stock holdings when the market incurs a steep drop, but don’t completely pull out of stocks (“nervous investors”).
There also are many who get out of stocks completely during a bear market (“panic investors”) out of fear of incurring further losses.
Given wide variances in how each investor reacts to bear markets— the aggregate data does imply, however, that Buffett-like investors are likely a comparatively small group. More people probably fall into the nervous and panic investor groups. This is not surprising, given the human inclination to be risk-averse.
As Daniel Kahneman and Amos Tversky demonstrated with “prospect theory,” we feel the pain of losses much more than we derive pleasure from gains.
Compounding matters, we humans commonly engage in hyperbolic discounting, which means we place greater value on rewards received sooner rather than later.
When the market falls and stocks are sold, we see the immediate value of avoiding further losses.
What isn’t considered are the potential future gains forfeited by not continuing to stick with stocks or, better yet, by rebalancing and allocating more money into stocks.
Rebalancing: A Better Method
If panicking is a big problem, a strategy that helps an investor to maintain a constant exposure to stocks should logically produce benefits. While some may view the best advice as simply being “don’t panic and stay allocated to stocks,” such guidance only works well for Buffett-like investors. All other investors need a strategy that gives them a sense of control. This is where rebalancing comes into play.
Rebalancing is the process of adjusting your portfolio back to your targeted allocation. For example, say your allocation calls for a 70% allocation to stocks and a 30% allocation to bonds. After a bad year for equities, your portfolio’s allocation changes to 60% stocks and 40% bonds. Rebalancing would prompt you to shift 10% of portfolio dollars out your bond holdings and into stocks, bringing your portfolio back in line with your targets.
Rebalancing is a buy low/sell high strategy—the opposite of what many investors actually do. It prompts you to buy assets after they have fallen in price. This may sound counterintuitive and may even be difficult to do the first time you try to employ it. Yet its bear market benefits may convince you of its value. Rebalancing lessens the blow of bear markets, making it easier to stick with stocks. In addition, rebalancing restores a sense of control. Rather than being left wondering what the best decision is for your portfolio based on what the pundits are saying about market direction, you have a strategy that prompts you to act and gives direction on how to do it.
http://www.aaii.com/journal/article2/the-danger-of-getting-out-of-stocks-during-bear-markets?viewall=true
calvintaneng
I love bear markets.
In bull markets shares are expensive and it is hard to find bargains.
In bear markets due to margin calls, panic and fear; good stocks are also sold down to bargain basement levels.
Example: a person could be holding good quality stocks. But he also dabbles in speculative stocks on the sideline. Suddenly, the market crashes & due to over leveraging or margin calls he is forced to sell both bad stocks and good stocks which he intends to keep.
So good stocks can be sold down as a result. In normal times people keep their gold and heirloom. However, due to unforeseen circumstances when bad times hit "even the most precious gold" is pawned for emergency cash.
Ha! this is the time to buy some real 99.9% real gold.
So how should we invest?
In Bull Run Times We MUST SELL OUR RISING STOCKS INTO STRENGTH.
As the Market goes higher and higher we should turn more and more cautious.
We Must Sell and Reduce Our Overvalued Stocks and Increase Our Cash Position.
Just keep a percentage of winning stocks still with Margin of Safety with potential to grow.
So At The Top We Must Only Be 30% to 50% Invested. And if the Market is Mad we should reduce our holdings even further to only 20% to 30% of the quality stocks. Of Course, We Can still find that occasional overlooked bargains. These we may safely buy some.
Now As The Bull Turns Into A Bear Market When All Things Bad And Good Are Thrown Out Together As A Whole in a time of great confusion we must search for those mispriced bargains. And there are many for the pickings.
At the very Bottom of the Market when people say
"Die lah"
"All is finished".
"Market is totally Doomed & Hopeless!"
YES! AT THE VERY DEPTH OF DEEP DESPAIR & MAXIMUM PESSIMISM WE MUST STEEL OURSELVES AND BUY MORE. LOAD UP MORE AND MORE BARGAIN STOCKS AND BE FULLY INVESTED AT MARKET BOTTOM!
It's like this - In the deepest depth of winter THINK of coming Summer.
And in the Hottest Summer prepares ahead for a Coming Winter.
2016-01-18 22:41