How To Cut Your Losses in a Bearish Market
The equities market has been in doldrums since FY 2014, the NSE All Share Index (ASI) has lost 50% from 1st January 2014 till date. This was anticipated before now given uncertainties as to the outcome of the general elections, low oil prices and foreign exchange fluctuations.
It is however important that investors learn to cut their losses in a bearish market and move on. Holding on to a stock in a bearish market with the hope of a rebound would inevitably lead to stock positions with large unrealized capital losses. Savvy investors at the beginning of FY 2015 sold off their stock positions, waited for the conclusion of the general elections and then returned to the market. This accounts for the 8.3% rise of the NSE ASI immediately after the elections. These funds were however withdrawn from the market again when there were no clear indications on the direction of economy from the present administration.
So, the question is how do you cut your losses when investing? To effectively cut your losses when investing, you need to properly monitor your investment. Don’t just buy financial instruments and keep them like some fancy jewelry. Even if you are investing for the long-term, be conversant with what is happening to your investment. Watch/read financial and economic news, be in the know as to what is happening in the market and how it affects you investment. If you cannot keep up with the news and happenings around, hire an investment advisor who will watch over your portfolio and guide you on what to do as the tide changes.
Flexibility is important in investing, be flexible with your investment decisions; look out for other viable investment options. At the moment the debt market offers better returns than the equities market (rates on 90day bills are as high as 14%). You can withdraw funds from the equities market and invest in the debt market till the economy/equities market starts showing signs of a rebound.
For new investors, make sure you have an investment plan/strategy in place before putting your money on any financial instrument. An investment strategy will clearly state, what to invest in, when to buy and sell, it would state prices at which to take profit or stop losses.
Before putting together an investment strategy, assess the factors that influence the movement of the market which are basically the socio-economic environment, economic actions of super powers, corporate actions, stock fundamentals and market sentiments. Put this side by side with your investment goals to form a realistic investment strategy. Make sure you have credible reasons for buying or selling a stock. Do not buy a stock because you like the company or other personal sentiments.
The sole aim of any investment decision is to grow your funds and give impressive yields. Investing for the sake of investing makes no economic sense. Monitor your investments and try to get as much as you can from them. Every Naira counts.
We advise that investors consult an investment advisor or broker before taking investment decisions.