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April 16, 2000
As we head into this bear market, it becomes necessary to batten down the hatches to weather the storm. Here are some of the first things to do as we head into a bear market:
- Reduce your margin exposure.
- Clean up your portfolio.
- Research out your next investments.
Reduce your margin exposure.
Margin can be a two faced friend. In good times when the stock market is climbing like crazy, using margin allows you to earn twice as much on your initial cash investment (see related article for details). But in bad times, such as this last week when the DOW had its largest point drop ever in a day (-617.78) and the NASDAQ dropped 25.3% for the week, margin becomes the Grim Reaper that kills your hard earned gains twice as fast. Reducing or even getting off margin completely will help investors withstand the market downward effects. If you are not margined to the limit or you are off margin entirely, you can't receive a margin call and be required to sell stock at a time when you don't want to.
Clean up your portfolio.
When in a bear market it is time to start to liquidate the stocks that never seemed to reach their potential even in the most recent run up of the stock market. You knew these stocks were just one announcement away from breaking out and becoming your next ten-bagger. But the breakout never occurred even under the great market conditions. It's time to face the facts and be honest with yourself. Will these mediocre stocks perform in this bear market or even ever at all? Cleaning out the dead weight in your portfolio now will allow you to set money on the side to be used later to buy strong stocks that will begin performing as the market begins to move upward again.
Research out your next investments.
Take the time during this market downturn to research your next set of strong investments (see related article). Stocks that dropped less as a percentage than the NASDAQ and DOW indices did are very strong against the market trend. Usually, these stocks will be the first to come back and outperform the wider market. It is always wisest to buy strength in a weaker market. Create a watch list of potential investments and when the market shows renewed strength in an upward trend, consider purchasing some of these stocks.
As we head into uncertain times, all we can do is try to adjust our portfolios to keep from losing too much money and to prepare for the next run up. If you plan well now, your patience and perseverance will be well rewarded later. Good Luck!
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