How to protect your investments in a bear market

2010-02-18
THE PUNCH Newspaper-Udeme Ekwere


Since the beginning of 2010, investors in the Nigerian capital market have heaved a sigh of relief following the respite from the freefall witnessed in the market between March 2008, and December last year.

However, a few investors are still skeptical stating that it is still possible that the turn-around recorded in the market in the last two months might be short-lived.

According to some investors, a lot of occurrences in the Nigerian economy suggest that the upturn witnessed in the market could be reversed without notice.

Ms. Banke Peters, a student, who made her first investment in the capital market during the peak of the market crisis in December 2008, said that she was attracted to the market by the continuous urging of operators and regulators who continued to say that the time was ripe for investors to invest in the market.

Speaking to our correspondent on the trading floor of the Nigerian Stock Exchange last week, she wondered how long the respite in the capital market will last, and if it is a wise decision to sell off some her shares that had gained in the past few months.

She said, ”Some of the equities I purchased have gained marginally, and I am afraid, because I do not want to get greedy and lost even the little appreciation on my shares, because I do not know if I will be able to cope with another bearish trend.

Like Peters, a lot of investors are worried on the best way to handle their investments during a bear period.

A bear market is usually an indication of a sluggish economy and a decrease in the value of overall securities, and it exists when equity prices are down 20 per cent or more from their highs, usually resulting in investors losing a lot of money

Experts in the market, however advise investors to be wise when choosing financial advisers that will handle their portfolio.

According to them, the first step to protecting your money in a bull market is to use several different financial advisors.

“If an investor makes use of only one financial adviser while investing, and such a financial adviser makes a bad investment in a bear market, such investments might not recover. So it is usually wiser to divide up your investments among several financial advisers so that if one of them makes a bad move with your money you will not lose everything.

According to ehow.com, to protect investments, investors should reallocate their portfolio regularly to reflect an emphasis on diversification and long-range thinking.

”Do not get greedy. As the market recovers, take profits on a systematic basis. If the market keeps rising as you engage in rational profit-taking, so what? When you‘re happy with your results, it doesn‘t matter what the broader market is doing,” it says.

The Managing Director, Clearview Investment Company Limited, Mr. Olu Odejimi says that portfolio diversification is still one of the best ways to ensure that investments are protected.

He says that too much concentration on one or two sectors of the market have resulted in investors experiencing significant losses in the market.

Odejimi says, ”It is very essential that an investor takes his time to conduct his own personal research before he goes into any investment. An important way to protect your money in a bear market is to invest with time tested companies that have made it through tough times before.

”These companies would have proven they are resilient and can bounce back from tough economic times. Research the companies you invest with and verify they have been around a long time and have a solid business model to make it through a bear market.”

The Managing Director, Dependable Securities Limited, Mr. Chinenye Anyanwu says that a bear market might be a good time for investors to embrace mutual funds.

This, according to him, is because mutual funds usually guarantee some level of profitability to investors.

He says, ”You know that mutual funds are usually handled by professional fund managers, who have taken time to research the market and come up with stocks that are less likely to lose out totally.”

He adds that investing in mutual funds can prove to be very beneficial in a bear market, not only because of the fact that the investor‘s funds are diversified into other companies that he ordinarily might not have been able to buy into, but also because most mutual funds are highly liquid.

Explaining further, Anyanwu says, ”Investing in a mutual fund makes it easy for investors to move in and out easily, as the funds can be sold at short notice with little difference between the sales price and the most current market value.

 

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