How to make money in a bear market

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By John Nyaradi, Wall Street Sector Selector
Monday, January 21, 2008

With the S&P 500 down 14.8% from its October high and the NASDAQ down even more, talk of recession and bear markets fills the financial press in a daily, non relenting barrage. Major support levels have been taken out and fear permeates the air.

In last week’s article, I discussed the damage bear markets can do to your portfolio. Here’s a quick review of the “bear” facts:

The average bear market lasts about 18 months and delivers an average decline of 35% in market value.

Bear markets, on average during this century, ravage global stock markets about 30% of the time. However, when you remove the highly unusual period from 1985 to 2000, which was almost exclusively a bull market, we find that over the remaining 85 years, bear markets and bull markets shared the stage approximately 50% of the time each.

The recovery from bear markets can be long and painful. Investors in the S&P 500 Index have still not recovered from the 2000-2002 bear. The 1929 bear took 25 years to get over and between 1966 and 1982, investors endured 16 flat to negative years.
Three Ways to Dodge a Bear Bite

If we are in a bear market, the average retail investor and mutual fund manager now faces the possibility that they’re standing helplessly in front of a freight train that could crush them and their portfolios and do irreparable damage to the financial security and retirement dreams of millions of investors.

But there is a group of knowledgeable individual and professional investors who have been making gains since the market has turned south.

Here’s how they’re doing it:

By moving a portion of their portfolios to cash. Professional investors and managers routinely move assets to cash when the market heads south. The old adage, “Cash is King,” is particularly valid during bear market melt downs.

By using stop loss points to exit profitable positions and take profits home or minimize losses on losers.

By buying protective put options to hedge long positions and limit losses without selling positions.
The point is that investors who are winning during this difficult time understand that if they’re not losing money, they’re effectively making money because when things turn back up, they’ll be moving ahead with wealth accumulation instead of spending what could be years just getting back to break even.

Investors Can Actually Make Money During Bear Markets

Most investors will continue doing what they always do, sitting around wringing their hands and worrying and watching Jim Cramer and looking for a nugget of hope from the Motley Fool.

But there is another group of individual investors, financial advisors and newsletter writers (me humbly included) who have been able to capitalize on this recent decline in the market. It’s not rocket science and here are just two methods that they’re using.

Buying stocks, ETFs or mutual funds that do well in bear markets. This is an obvious possibility, and, in fact, many investors have already figured this out. Gold has long been a safe haven in troubled times, and this time has been no different as it has been a stellar performer and is easily accessible through gold stocks or ETFs. Commodities have been on a tear and again are available through ETFs. Declining dollar funds and bond funds have also recently served investors well.

Buying “inverse” ETFs that move opposite to the underlying index and so the value of the investment rises as the underlying index declines. This has been made possible through the relatively recent development of these inverse funds, and one of the best providers of this product that I’ve found in my work at Wall Street Sector Selector is the ProShares Family of Exchange Traded Funds. They offer 35 inverse ETFs that allow “shorting” of the market, that can be used in both qualified and non-qualified investments and that track the major indexes, sectors and international.
So, no one can say for sure if we’re in a “bear” market or if this is just a sharp correction. No one can tell you that it will or won’t continue. Sadly, there are no crystal balls, as much as we’d all like to have one. But even these days, some investors are making money and all investors have alternatives to watching a bear maul their portfolio.
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Savet „doktora Dabića”: Nema bezizlaznih situacija

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Peaceful Wealth: The inner game of investing
By R. Scott Maxwell, Talis Advisors
Monday, October 6, 2008

How can you maximize your potential for success in difficult times? Have you run for the hills or are you searching for today's hot opportunity? Your head says one thing but your heart disagrees and you have no idea who is right. The inner game of investing separates the winners from the losers. Do you know how to play?

Your actions today will affect you tomorrow.

If you are like many investors during this difficult market stretch, you want to run for the sidelines (if you haven’t already done so) and eliminate the potential for any more declines in your net worth.

The news of the day sounds so awful. Your account value has shrunk. MSNBC and CNBC analysts keep talking about “the next great economic depression” and how we may be in the midst of a protracted market meltdown that rivals 1929. The President of the United States told us our entire economy is in danger and we are on the precipice of a long and painful recession.

Those sidelines look better and better, don’t they?

Sure they do. Sitting on them also virtually guarantees you will underperform the market over the long run.

How could that be, you say? How in the world could avoiding today’s pain and then swiftly moving back into the market when “things get better” be the wrong thing to do?

Because that is exactly how the market works.

Consider these finding from the independent market research firm DALBAR, Inc:

Over the 20 years ended December 31, 2007, the average equity fund investor earned an average of just 4.48% per year, compared with 11.81% for the S&P 500

Over the same time period, the average bond fund investor actually lost 1.49% in purchasing power each year.

Investors who pursued a systematic, buy-and-hold strategy could have improved their performance results by 50% or more over 20 years.
Let those numbers sink in for a moment. The average investor punted away 7.33% of annualized returns because of their behavior in good times and in bad times over the past 20 years. Losing 7.33% of potential annualized return means the average investor starting out with $100,000 on January 1, 1988 let over $411,500 slip through their fingers.

They let it slip through their fingers because they listened to the “crisis” news of the day and moved out of the market in “bad times” and back into the market in “good times”.

They let it slip though their fingers because they tried to pick “hot” stocks or the “best” mutual funds based on past performance.

Because they paid punitive annual fees to hear a commission driven sales pitch from their stock broker or insurance agent cloaked as advice.

Because they were sold Class A mutual fund shares that skimmed away up to 5.75% of every dollar invested in them or bought actively managed funds with their high expense ratios that sabotage returns.

Because they succumbed to their inner voice telling them to abandon risk management or global diversification because the good times would last forever or the bad times would never end.

I do not pretend to know when the markets will recover or how much lower they may go. Selling everything you own and sitting on the sidelines for a week, or a month, or a year (or more) may prove to be the ideal short-term strategy once we have the clarity of hindsight to reflect upon.

Fortunately, that exact same rear-view mirror offers you a very important long-term lesson about the rewards of patience that completely contradicts your emotional response to bad news.

History brings clarity and promotes perspective. 20 years of hindsight teaches us there is a better way if we are willing to head the lesson.

Ask yourself two questions today (do it now, this is important):

Do I need this money today?

Is my investment strategy based on seven decades of evidence-based modern economic theory or have I bought into Wall Street’s stock picking, market timing, return chasing, product centered marketing machine?
If you do need it today, meaning you need to withdraw it for living expenses or emergencies, then you must immediately analyze your investments to ensure you have the appropriate level or risk to match your time horizon. Equity market risk is for the long-run. A five year time horizon is our rule of thumb to define long-term.

If you don’t need it today, then do your best to manage your inner voice of worry and keep your eye on the horizon. Make it your personal mission to separate yourself from the flawed and maddening crowd that DALBAR annually exposes.

Your answer to the second question is equally important. The long-term view is meaningless to anyone invested in Lehman Brothers, Bear Stearns, Washington Mutual, Freddie Mac, Fannie Mae, AIG or any number of other past or future companies to inflict unrecoverable losses on their investors. The market offers wonderful long-term rewards to the properly diversified and patient investor. Chasing returns, picking stocks, timing markets and buying into the commission driven sales machine of the brokerage and insurance worlds are a recipe for underperformance, if not total disaster.

Embrace the fact you cannot predict how markets will behave at any given time. Diversify your portfolio now. Match the return objectives of your investments to your personal comfort level and account for times like these. Make sure you have an elegantly designed portfolio built to weather the inevitable storms of the market while offering real opportunity for growth.

And always remember your success is rooted in your commitment to be there when the next upcycle begins.

Not everyone can win at the inner game of investing. It is hard for the average person to ignore the noise of the moment and the worries of the day. It is hard for the average person to remain committed to a properly diversified, low-cost, asset class portfolio methodology when so many competing voices seek to lead them astray. DALBAR reminds us every year just how hard things can be when you decide to follow the herd.

The evidence is clear. A trusted advisor will keep you on track. The rules of investing have not changed. Markets still work. Risk and reward are still related. Diversification remains paramount. Portfolio design is essential. Performance is the fruit of patience. Inner peace is Peaceful Wealth.

TOP 3 naložbene ideje

Na finančnih trgih volatilnost še vedno ostaja edino pravilo. V takšnih razmerah vam svetujemo, da ohranite mirno kri in se držite zastavljenih dolgoročnih naložbenih ciljev.

Zagotovo si v tem trenutku upamo trditi zgolj dvoje:

Bližje smo koncu, kot začetku krize.
Sedaj je pravi čas za postopna vplačila prostih sredstev (po metodi povprečnega stroška).

Tokrat smo za vas pripravili tri odlične naložbene možnosti in povzetek strokovnega seminarja na temo Finančna kriza, katerega smo pripravili za stranke Svetovalne skupine INDIVIDA:

TOP 3 naložbene ideje:
Iz zelo obširne in neodvisne ponudbe Svetovalne skupine INDIVIDA smo izbrali 3 naložbene ideje, za katere menimo, da v tem trenutku ponujajo 3 odlične naložbene možnosti.

Pregled stanja svetovnega gospodarstva (strokovni seminar Finančna kriza)
Pogled na globalno situacijo skozi oči Saša Ivanoviča, upravitelja premoženja pri Triglav DZU: Grafični prikaz 10 ključnih ekonomskih indikatorjev, ki služijo za napovedovanje prihodnjih stanj svetovnega gospodarstva.
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Savet „doktora Dabića”: Nema bezizlaznih situacija

Put your losses to work for you
By Brett Ellen, American Financial Network
Monday, November 3, 2008

The sensational headlines over the past few months may have you thinking about pulling out of the market, but peppered in among those doom and gloom proclamations is solid advice, urging investors to take advantage of a number of significant opportunities present in today’s market. Even during uncertain times such as these there are ways to turn your loses into gains if you just know where to look and whom to turn to.

I’d argue that there are genuine reasons for many investors to be concerned, today. People are watching their assets decline not knowing how long it will take to recover their losses. They’re scarred to talk to their bank or their big brokerage house, but don’t know how they are going to meet their financial responsibilities. It’s my job to understand what is important in their life and review what is being done on a planning basis to make sure their personal needs are being dealt with.

Financial advisors can help alleviate stress by reviewing your financial plan and evaluating where you are in terms of meeting your long-term goals. An advisor that works for an independent broker dealer is not beholden to any specific product or investment. They are able to provide objective counsel to clients without the undue pressure of sales goals or proprietary product restrictions.

If you don’t have a financial plan, now is the time to get one. An independent financial representative helps people define their goals and then find financial solutions to best fulfill those goals in good times and bad.

Today’s economic worries have people overwhelmed, and rightfully so. However by working together with a professional advisor, investors can take action and work through the current turmoil.

For example, with a broad array of asset classes in the red, you may decide to put some of those losses to work for you. Remember, each year you can reduce your ordinary taxable income by up to $3,000 in net capital losses. Particularly if you sold taxable investments at a profit this year, you might decide to sell some portfolio losers to offset those gains. Keep in mind that you’ll receive a preferred tax rate on long-term capital gains (gains on shares held for more than one year), but short-term gains (on shares held less than a year) are taxed at your ordinary tax rate.

Naturally, your sell decisions should consider the relative strength of each investment and general economic conditions, rather than be motivated solely by potential tax savings. What’s more, you need to be mindful of wash sales rules. That is, no loss will be allowed on your sale if you buy the same or substantially identical security within 30 days before or after the sale. Many financial advisors collaborate with tax professionals to help you reach your goals. If you have questions, consult your personal tax advisor.

Now also may be an ideal time to convert your traditional IRA to a Roth IRA while value is low. As background, when you convert a traditional IRA to a Roth IRA you must pay income taxes on the account balance. However, once those taxes are paid, all qualified withdrawals from your new Roth IRA are tax-free provided you hold your Roth IRA for at least five years and are at least 59 ½ years of age. While investors often see the benefits of adding a tax-free Roth to their portfolio, the cash outlay to pay conversion taxes can be a hurdle they just can’t clear.

However, if you hold a traditional IRA account that has declined in value over the past year, now may be a good time to convert to a Roth. Because the value of your IRA account is down, you will owe less in taxes now than you might have in the past. The extra bonus is that your new Roth will capture gains from the market’s eventual rebound on a tax-free basis.

You can convert your traditional IRA to a Roth IRA if your modified adjusted gross income (MAGI) is under $100,000. Note, however, that that income cap is scheduled to disappear in 2010, courtesy of the Tax Increase Prevention and Reconciliation Act of 2006. Therefore, after 2010, you can convert your traditional IRA to a Roth IRA, regardless of your income or filing status. (Currently, you cannot convert if you are Married Filing Separately, unless you have living apart all year.)

Keep in mind, that as you work through your qualifying calculations, although the proceeds from the conversion are taxable as ordinary income, they do not count towards your MAGI. That is, if you have $98,000 in MAGI, converting $1 million from a traditional IRA to a Roth IRA will not push you over the $100,000 Roth conversion limit.

As you contemplate portfolio moves, your advisor will help you not to be swayed by emotional responses to the market’s recent roller coaster ride. For example, after one of the most volatile weeks in Wall Street history and a series of unprecedented moves by the government, now may feel like a good time to cash out, or, minimally, to stop investing new money. You might bolster your argument to sell with the promise that you’ll re-invest once the market settles down. However, identifying just how narrow that window of opportunity is may change you mind. In 1994, a study authored by Dr. H. Nejat Seyhun, a professor of finance at the Ross School of Business at the University of Michigan found that, between 1963 and 1993, 95% of market gains were generated during a mere 1.2% of the trading days. Recently, Dr. Seyhun revised his study, incorporating data through 2004. His results were virtually unchanged: 96% of market gains between 1963 and 2004 occurred during only 0.9% of the trading days. Given those slim percentages, it’s likely that, by the time you’re feeling bullish again the market already will have rebounded significantly, shutting you out of those initial gains.

With that as a backdrop, if you have extra cash on hand and are decades away from retirement, equities’ 40% decline from last year’s high present an attractive buying opportunity. Whether the current bear market has reached the bottom or not is unclear, but stocks are certainly on sale. Rather than focus on a sector you perceive as safe, make broad-based contributions to the market on a regular basis. That practice, known as dollar cost averaging, ensures that you buy more shares when prices are down. If you are retired or on the verge of retiring, you’ll want to ensure you have enough allocated to cash and bonds to cover your living expenses for at least the next several years.

I understand that the market’s profound slide over the last few weeks has been unnerving so I continue to meet with my clients to ensure they are well positioned to manage any future volatility and to take advantage of new opportunities. The market’s behavior may be unprecedented, but we can ensure we make rational decisions by basing our moves on life’s goals, willingness to stomach the inevitable market swings, and time horizon.

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Brett Ellen, founder and president of American Financial Network, is a financial planner and investment advisor representative with Securities America Advisors who specializes in wealth management and corporate benefit planning services. Additionally, Ellen established and is an active part of the Financial Solutions Alliance, a network of financial service providers from across the country that work collaboratively to address the financial and business needs of their clients. Unprecedented in his ability to serve both individual investors and corporate planners, Ellen is recognized by Securities America as their top advisor.
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Savet „doktora Dabića”: Nema bezizlaznih situacija