During bull markets, investing seems just so easy. You buy one share, and it rises. You buy another share, and it also rises. Suddenly you feel you can do no wrong.
But during bear markets, investing is the most difficult thing in the world. You buy what looks like a bargain, only to find the share falls further. You invest in a sure thing, only to find it fall through the floor. Maybe you’re not cracked up for this investing lark after all.
Most commentators have been expecting a fall
The fact is that sometimes there are bull markets, and sometimes there are bear markets. If you can survive, and even thrive, in both environments, then you have the makings of a successful investor. Falling markets are an opportunity to show your mettle.
Analyse a 20-year chart of the FTSE 100, and you will see that it reached a record high in 1999, only to tumble to a low in 2003. It then reached another high in 2007, only to fall to a low in 2009, during the depths of the Credit Crunch. Since then we have had a five-year bull market, though even during this run the ride was bumpy, as we had the Eurozone crisis of 2011. The overall pattern is remarkably simple: a zigzag, followed by another zigzag, and then a zig, followed by what looks like the beginnings of a final zag downwards.
This pattern, and the view amongst most commentators, indicates that, with the market increasing so much over the past few years, at some point the FTSE 100 was going to fall. Of course, what shape these falls will take no one really knows.
A cautious and balanced approach
So, what is my approach? How do I invest when the market is falling? Well, my approach is basically to be cautious. In this environment I have taken profits where I can. If I am strongly in profit in a company — for example, with building and infrastructure company Carillion, with online betting company GVC, or with emerging market company Bank of Georgia — I have sold and crystallised these profits.
In this way I have built up my cash levels. But, I must emphasise, the bulk of my money is still invested in shares.
The market has fallen substantially already, by roughly 10%, and so I have made a few cautious purchases. At the moment there are many companies that are selling at bargain-basement prices, so I have taken the opportunity to buy into some of these businesses. The recent tumble in the markets seems to be broad-based: blue chips, small caps, emerging markets and commodities, including oil, have all fallen. Yet some companies have fallen a lot while others have treaded water, so there has been the opportunity for some rotation.
Overall, my approach is cautious and balanced. I have adjusted my portfolio and am making a few careful sales and purchases, but I have left most of my portfolio to sail (hopefully calmly) over the rising and falling waves.