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Bear Market Risk and Investing Wisely

Posted on 01/26/2016

Contributed by: Alexander Flecker
Registered Assistant to Mark Gajowski

 

Investors over the last few weeks have heard the term Bear Market at an alarming rate. A Bear Market is a 20% downturn in large indexes over at least a two month period; most commonly the Dow Jones and S&P 500. 2016 has shown signs that the Bear Market could start in this February if the current direction of the economy does not make a U-turn. The slow start to this year and the negative market sediment can make any investor anxious, especially if retirement is around the corner.

For most, January has been tough to watch as the Dow approached 2015 lows and the five top S&P 500 earners (a/k/a the “FANG” stocks) have had negative price shifts (Facebook, Apple, Amazon, Netflix, and Google). That is despite contributing all but .04% of S&P 500 growth in 2015 (3). Across the globe, debt to GDP ratio is climbing indicating companies are becoming more leveraged year over year. The Global debt is approaching 60 Trillion dollars; 289% of the Global GDP, a higher debt to GDP ratio than what preceded the last financial crisis (2, 4).  That could potentially be trouble for the global banking system if they can’t service their loans to large corporations.

The oil supply is increasing at a faster rate than its demand and it has greatly affected the prices of the industry. In 2015 the global inventory increased its capacity and drilled for another 1 billion barrels (1). This causes domestic oil companies to change the way they compete in their business. They are having trouble growing because of the industry surplus which drives prices down and squeezes their margins. To compete on a tighter budget they stay completive by absolving liquidate assets in replace of what use to be profits. This also comes amidst statements from OPEC about maintaining oil production and rising Middle East tensions between Saudi Arabia, Iran and internal conflicts inside Syria. The uncertainty of the oil hotbed of the globe weighs heavy on the domestic oil industry outlook and the future crude oil indices such as CLH16 (NYMEX) (5).

At the first sign of a bear market, many investors think selling off is the best way to protect them from a down market. To the contrary, this is when risk can most effectively be managed to create long term value. Personalized portfolio strategies can all have different levels of risk and market exposure but when used properly, can be a useful tool to help beat the street in down markets.

  • Diversification can get a bad reputation in Bull markets because the more you diversify for protection, the more you lose potential for a greater return. Inversely, in a Bear market, you reduce potential for a greater loss. Spreading your holdings out in several through negatively correlated sectors is a common practice to achieve a well-diversified portfolio.
  • As the market declines it becomes increasingly more important not to invest in companies that are highly leveraged. A moderate decline in sales or market capitalization can have exponential effects on ability to pay debt in an effort to still bring positive growth for investors.
  • Always gradually step into the market as opposed to investing all of your excess liquid assets at once. In times of market downturn it is particularly attractive to young investors to invest heavier than before and that requires excess cash available for investing at more attractive prices. Companies that are being thrown out with the bath water could be found at a discount, making it an attractive time to start accumulating long term holdings.
  • Seek help from a financial professional. Since the market is not rational and investing is inherently risky, a Financial Advisor that can make a personalized plan to manage your risk and exposure to market, while also managing other important personal financials such as taxes, insurance, retirement planning and more. (7)

When investing in the market it is important to remember that high returns come at a risk, and market down turns aren’t always worst case scenario for your portfolio. Keep in mind the Berkshire Hathaway CEO, Warren Buffet and his take on negative investor sediment “When others are fearful be greedy, and when others are greedy be fearful.”   

We at Magii are here to help you now and over the many years to come.  CONTACT us today for a discussion and see the difference it can make in your life.

 

  

Work Cited:

  1. Robert Rapier’. "Is the World Drowning in Oil." Forbes. Forbes Magazine. Web. 25 Jan. 2016.
  2. "NationalDebtClocks . Org." National Debt Clocks. Web. 25 Jan. 2016.
  3. Rob Isbitts. "This Market Has FANGs, but Not Much Else." MarketWatch. 15 Nov. 2015. Web. 26 Jan. 2016.
  4. "The Never-ending Story." The Economist. The Economist Newspaper, 2015. Web. 25 Jan. 2016.
  5. "What Is Driving the Bear Market and What Should Investors Do?" Real Money. Web. 25 Jan. 2016.
  6. "U.S. Energy Information Administration - EIA - Independent Statistics and Analysis." Short-Term Energy Outlook. Web. 25 Jan. 2016.
  7. "3 Smart Ways to Protect Your Stock-Market Gains." Www.kiplinger.com. Web. 25 Jan. 2016.

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