Bonds and Shares
15/05/2016
Should you sell or hold your mutual funds in a bear market?

As an investor, you know the stock market is cyclical. But intellectually understanding that bull markets are followed by bear markets is not the same as actually living through a Wall Street crash and watching the value of your portfolio decline, sometimes sharply.

That's when a mutual fund investor's discipline and patience can get tested, but also rewarded over time, as the performance of the best mutual funds prove.

The 2008 bear market was a prime example. Following a powerful bull cycle that began in March 2003, the financial and housing crisis triggered a downturn that saw the S&P 500 decline 58% from the peak in October 2007 to the bottom in March 2009.

The top-performing stocks in the prior bull market suffered similar fates. Apple fell 61% from the end of December 2007 through January 2009, while Google, now known as Alphabet, lost 67% of its value from November 2007 until finding its footing in November 2008.

Mutual Funds vs Stocks

When you buy and sell individual stocks, you are your own fund manager. It's up to you to actively manage risk and reduce your exposure in a market downturn since the leaders in the prior bull cycle typically do not bounce back to lead in the next one.

However when you invest in mutual funds, you're relying on a professional fund manager to oversee and adjust the portfolio as needed over time. So when investing in a fund to achieve a long-term goal, such as retirement or university savings for a young child, your best bet is to buy right and sit tight.

As the founder of the influential International Business Daily, William J. O'Neil wrote in his classic book ‘How To Make Money In Stocks’: “A well-selected, diversified growth-stock fund run by a well-established management organization will, in time, always recover from the steep corrections that naturally occur during bear markets. The reason mutual funds come back is that they are broadly diversified and generally participate in each recovery cycle in the economy."

Looking at the 10-year returns of the top five growth funds from 2006 to 2015 proves this point. As you would expect in a severe bear market, even these long-term, top-performing funds showed a decline in 2008 - from 25% to 46%. However, investors who sat tight in 2008 saw overall gains of 205% to 240% from 2006 to 2015, more than making up for the 2008 decline and more than doubling the S&P 500's 102% rise during the same period.

Check the fund’s long-term performance before investing

As a fund's prospectus always says, past performance is not a guarantee of future results. But checking a mutual fund's long-term track record - through both bull and bear markets - gives you insight into the management team's ability to manage risk whilst also generating growth.

In an interview with the Investor’s Business Daily William Bell, one of the top Fund Managers in the US said, "We prepare for a bear market before it happens. … Our entire process is basically built around finding companies that are going to grow at an above-average rate, but also provide a lot of downside protection when things fall apart."

Bell added that he looks for stocks that have a "counter-cyclical component" to them. Key to that is checking the company's long-term earnings record, particularly during weak economies.

"If a company is able to grow through a recession," Bell said, "we have pretty good confidence that the stock is also going to do better than the rest of the market during a recession."

The strategy of Bell and his co-managers and their focus on so-called "steady-Eddie" companies is reminiscent of a certain legendary investor. "If you look at what we do," Bell noted, "it's almost exactly what Warren Buffett does, just in the small- and mid-cap space."

Cost averaging helps manage risk and maximise long-term gains

Cost averaging - i.e., regularly investing a set amount of money in a mutual fund regardless of market conditions - can be an effective way for investors to protect themselves against market fluctuations. Rather than trying to time the market, you increase your holdings incrementally, typically on a regular basis, whether monthly, quarterly or at your preferred frequency. Thus, during a bear market, you're buying shares in the fund at a lower price, helping to hold down your average cost-per-share and increase your returns over time.

 

This article has been sourced from the article Guide to Your Financial Education, found on our international partner, Morningstar website, as a guide to provide readers with useful information to improve their knowledge of investments, though it does not constitute and should not be treated as investment advice.

 


 

F’suq bl-ishma niżlin (bear market) għandek tbigħ jew iżżomm il-mutual funds tiegħek?

Bħala investituri, aħna lkoll nafu li s-suq tal-istocks jew tal-ishma jaħdem bħal ċiklu. Imma filwaqt li rridu nifhmu li wara li s-swieq jitilgħu dawn xi darba jridu jinżlu, mhuwiex l-istess bħal meta wieħed jgħaddi minn riċessjoni f’Wall Street (li huwa d-distrett finanzjarju fi New York) hu stess, meta jara l-valur tal-portafoll tiegħu jaqa’, kultant b’ammont sostanzjali.

Huwa f’dan il-mument diffiċli li l-bniedem li jkun investa fi mutual fund juri x’dixxiplina u paċenzja għandu – imma wkoll jista’ jkun li jiġi ppremjat fuq medda taż-żmien, kif juru r-riżultati tal-aħjar mutual funds.

Il-bear market tal-2008, meta l-ishma kienu niżlin, huwa eżempju tajjeb. Wara perjodu b’saħħtu, li beda f’Marzu tal-2003 (magħruf bħala ‘bull market’), li matulu l-ishma bdew tilgħin, il-kriżi finanzjarja u tal-propjetà wasslet biex l-ishma tal-S&P 500 jinżlu 58% mill-ogħla valur tagħhom f’Ottubru tal-2007 għall-aktar livell baxx, f’Marzu tal-2009.

L-aktar stocks li kienu sejrin tajjeb ġralhom l-istess ħaġa. L-Apple, per eżempju, niżlu 61% bejn l-aħħar ta’ Diċembru tal-2007 sa Jannar tal-2009, filwaqt li Google, il-kumpanija magħrufa wkoll bħala Alphabet Incorporated, tilfet 67% mill-valur minn Novembru tal-2007 sakemm reġgħet sabet saqajha f’Novembru tal-2008.

Il-mutual funds imqabbla mal-istocks

Meta nixtru u nbigħu stocks jew ishma individwali, inkunu qisna l-‘fund manager’ bi flusna stess. Huwa f’idejna biex naraw jekk irridux nieħdu riskju b’mod attiv u anke jekk innaqqsux l-investiment tagħna f’suq li jkun nieżel għaliex l-istocks li jkunu sejrin tajjeb meta ċ-ċiklu jkun b’saħħtu ġeneralment ma jerġgħux ikunu l-istess ishma li jkunu b’saħħithom fiċ-ċiklu ta’ wara jew aħjar meta jerġa’ jkun hemm bull market.

Imma meta ninvestu fi mutual funds inkunu qed inserrħu fuq fund managerprofessjonali biex jaralna u jaġġusta l-portafoll tagħna hu, kif ikun meħtieġ, fuq perjodu ta’ żmien.

Għalhekk, meta ninvestu fi mutual fund biex nilħqu l-għan fit-tul li jkollna, ngħidu aħna għal meta nirtiraw jew biex infaddlu l-flus għal uliedna għal meta jikbru u jidħlu l-università, l-aktar ħaġa importanti hi li tixtri fuq rakkomandazzjoni tajba u tħalli ż-żmien jgħaddi.

Bħalma kiteb il-fundatur tal-ġurnal influwenti Investor’s Business Daily, William J. O'Neil fil-ktieb klassiku tiegħu, “How To Make Money In Stocks”: “Fund tal-ishma magħżul tajjeb, b’tema ta’ tkabbir u diversifikat, immexxi minn organizzazzjoni finanzjarja stabbilita, maż-żmien dejjem jirkupra mill-korrezzjonijiet iebsa li jseħħu, b’mod naturali, meta s-swieq jinżlu. Il-mutual funds jerġgħu jirkupraw għax huma diversifikati ħafna u, ġeneralment, ikunu parti minn kull ċiklu ta’ rkuprar tal-ekonomija”.

Kif tista’ tistenna f’bear market jew suq li qed jaqa’ b’mod qawwi, anke dawn il-funds ta’ kwalita’ għolja u li jkollhom ħarsa ‘l quddiem fit-tul waqgħu sew fl-2008 – bejn 25% u 46%.

Pero meta tara d-dħul kumulattiv fuq medda ta’ għaxar snin investituri li ma ppanikkjawx u żammew l-investiment tagħhom raw żieda fil-valur ta’ bejn 205% sa 240% mill-2006 sal-2015, li patta ħafna aktar mit-telf li kienu sofrew fl-2008 u li hu aktar mid-doppju mill-102% li għamel l-indiċi S&P 500 fl-istess perjodu.

Iċċekkja r-riżultati fit-tul tal-fund qabel ma tinvesti

Kif jgħid dejjem il-prospett ta’ kull fund, il-passat mhux garanzija tal-futur. Imma meta niċċekkjaw it-track record fit-tul ta’ mutual fund – f’kull żmien, kemm meta s-swieq jitilgħu u kemm meta jinżlu – ikollna idea aħjar tal-ħila tal-immaniġġjar tat-tim finanzjarju tal-fund biex jimmaniġġja r-riskju u jiġġenera d-dħul.

F’intervista li kellu William Bell, wieħed mill-aqwa fund managers Amerikani, mal-Investor’s Business Daily, hu qal li: “Aħna rridu nħejju ruħna għal meta s-suq jinżel minn qabel ma jibda nieżel. … Il-proċess sħiħ tagħna huwa, bażikament, mibni fuq li nfittxu nsibu kumpaniji li naħsbu li se jkunu jikbru b’rata ’l fuq mill-medja, imma nipprovdu wkoll ħafna protezzjoni għall-investituri tagħna għal meta jew jekk is-swieq imorru ħażin.”

Bell żied jgħid li hu jfittex stocks li għandhom “komponent li jaħdem kontra ċ-ċiklu” għall-investituri tiegħu. Dan jagħmlu billi jiċċekkja r-rekord tal-qligħ fit-tul ta’ kumpanija, b’mod partikolari fiż-żmien meta l-ekonomija tkun sejra ħażin. Qal ukoll li: “Jekk kumpanija jirnexxilha tikber f’riċessjoni, għandna nkunu kunfidenti li l-istock tagħha wkoll ikun se jmur tajjeb mill-bqija tas-suq matul ir-riċessjoni.”

L-istrateġija ta’ William Bell u l-managers ta’ miegħu u l-attenzjoni partikolari tagħhom għal kumpaniji magħrufa bil-laqam “steady-Eddie”, jiġifieri sodi, ifakkarna fl-investitur leġġendarju – Warren Buffett. Bell qal “jekk tħares x’nagħmlu aħna nagħmlu hu eżatt dak li jagħmel Warren Buffett, pero f’kumpaniji ta’ daqs żgħir u medju.”

Il-cost averaging jgħinna nimmaniġġjaw ir-riskju u nkabbru d-dħul fit-tul

It-terminu “cost averaging” ifisser meta ninvestu b’mod regolari ammont fiss ta’ flus fimutual fund irrispettivament mill-kundizzjonijiet tas-suq. Dan jista’ jkun mod effettiv għall-investituri kif iħarsu ruħhom mill-instabilità u ċ-ċaqliq fis-swieq.

Aktar milli nippruvaw inbassru meta jkun se jinżel u jitla’ s-suq, inżidu l-assi finanzjarji tagħna bil-mod, fuq bażi regolari, ngħidu aħna kull xahar, kull tliet xhur jew skont i l-preferenza tagħna.

Għalhekk, meta s-suq jinżel, inkunu qed nixtru l-ishma bi prezz aktar baxx milli nkunu għamilna qabel u b’hekk inkunu qed inżommu l-ispiża medja ta’ kull sehem aktar baxx apparti li nkunu qed inżidu d-dħul tagħna maż-żmien.

 

It-tagħrif li imsemmi hawn fuq ġej mingħand l-imsieħeb internazzjonali tagħna, Morningstar u mis-sit elettroniku tagħhom. Fit-taqsima Guide to Your Financial Education tingħata gwida b’informazzjoni utli kif inżidu l-għarfien tagħna dwar l-investimenti, għalkemm dan ma jikkostitwixxix u mghandhux jiġi ttrattat bħala parir dwar l-investimenti.

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