Is the Bull Run Over?

It has been a tougher year for stock investors than the headline numbers might suggest. The Australian All Ordinaries is down around 5% but some of the favourite names are down more. Telstra is down 16%, Commonwealth Bank is down 15% and AMP is down 53%.

The first 3 months of the year we saw a 7% decline in the index. The last two months have seen an 11% decline.

It seems like markets are getting increasingly nervous and as usual, at these times the financial media is rolling out the perennial bears because the only story they ever tell just happens to match what is occurring right now.

So are we seeing the end of the Bull Market in stocks?

You can agonize over this question and ponder what action to take every day. But it won’t help us because we don’t know what the future holds. No one does.

So, what can we do to survive when markets take a downturn?

The first thing all investors need to accept is this market action is absolutely normal. There is no reason to think an 11% downturn means the end of the Bull Market. If you can’t endure swings of 20% or even more, don’t invest. Or perhaps invest less. More on that later.

This Bull Market has seen three 20%+ down moves and we are still in a Bull Market. They happen. Often. 10% down moves happen about once per year on average. 5% down moves happen twice per year on average.

If the volatility does worry you simply stop looking at the market so much. While this may sound silly, the less frequently you look at the stock market, the less volatile it will seem.

Despite the 24/7 flow of news and information you can get away with looking at your portfolio less frequently than you think. If you are looking more than once a week, you are wasting your time. Ideally, you would only look once a month.

Stocks are volatile. Get used to it and more importantly take advantage of it.

If there is a stock you told yourself you would buy if it got cheap enough, don’t just stand there, go look at it. See where its price is, what its valuation is and how sound the underlying business fundamentals are. While it is very hard to know where the bottom will be, if you don’t at least look while the market is down your odds of catching it while it’s on sale will be very low.

It is times like these when we stress having an adequate cash pile on the side. Not only does this cash pile reduce the overall portfolio loss when these regular pullbacks occur, it means you can take advantage of the sale prices on offer and pick up some bargains.

But, the single biggest difference you can make is to have a long term plan. Keep your investment time horizon in mind. As investors we can’t choose the market conditions that will exist over our lifetime; we can only choose how we’ll react to them. On a daily, monthly or even yearly basis, the stock market can appear to be very volatile. Over periods of five years or more, the likelihood of positive returns rises dramatically.

If you have your short term needs for cash flow covered, you increase your ability to tolerate downside volatility. When you can tolerate the volatility easily, you might not even notice it.

I started with the statement “It has been a tough year for stock investors”. When you accept volatility, don’t look at your portfolio so often and have a plan in place to take advantage of it, your response is likely to be “has it? Not for me”

“If you can’t endure swings of 20% or even more, don’t invest.”

Matthew Jones, Director, Capital 19 Global Investments