Bear market: How to deal with capital losses

The question of why stocks fluctuate has been a nagging one, especially for beginners in the art of investment. Falling stock prices are sometimes a hard pill to swallow. But experts have cautioned that long-term investors should not be concerned. A leading investment expert and the proprietor of About.com, a major investment network, Mr. Joshua Kenon, says the answer to this lies in the nature of the stock market, which is based on volatility. According to him, “The stock market is essentially a giant auction - only instead of antiques and heirlooms, it is ownership in businesses that’s up for grabs. Stocks are traded at places called exchanges. At these exchanges, traders buy and sell shares of companies. He says, generally, the price of a stock is determined by supply and demand. For example, if there are more people wanting to buy a stock than to sell it, the price will be driven up because those shares are rarer and people will pay a higher price for them. On the other hand, if there are a lot of shares for sale and no one is interested in buying them, the price will quickly fall.

On the trend in the market, he says, “Because of this, the market can appear to fluctuate widely. Even if there is nothing wrong with a company, a large shareholder who is trying to sell millions of shares at a time can drive the price of the stock down, simply because there are not enough people interested in buying the stock he is trying to sell. Because there is no real demand for the company he is selling, he is forced to accept a lower price.”

Knowing how the stock market works will help investors understand the individual factors that cause wild fluctuations in stock prices. This understanding will help investors to take advantage of the manic-depressive behaviour that sometimes seems to affect their portfolio, as it is being currently experienced on the Nigerian scene.

How a bear market affects your investments

Generally, a bear market will cause the securities you already own to drop in price. The decline in their value may be sudden, or it may be prolonged over the course of time, but the end result is the same: the quoted value of your holdings is lower. In this trend, two fundamental principles must be noted. One, that a bear market is only bad if you plan to sell your stock or need your money immediately. Two, falling stock prices and depressed markets are friends of long-term, value investors.

In other words, if you invest with the intent to hold your investments for decades, a bear market is a great opportunity to buy. It is always amazing that some “experts” advocate selling after the market has fallen. The time to sell was before your stocks lost value. If they know everything about your money, why didn’t they warn you the crash was coming in the first place?

What to do in a bear market

The biggest question that normally agitates the minds of investors in times of capital losses is: What do I do with my money in a bear market?

Kenon says the first thing you need to do is to look for companies and funds that are going to be fine ten or 20 years down the road. “If the market crashes tomorrow and causes Gillette’s stock price to fall by 30 per cent, people are still going to buy razors. The basics of the business haven’t changed. This brings us to the third principle of a bear market: ‘Learn to separate the stock price from the underlying business.’ They have very little to do with each other over the short-term. When an investor understands this, you will see falling stock markets like a clearance sale at your favorite furniture store; load up on it while you can, because history has shown that prices will eventually return to more reasonable levels.–Punch