Bear Markets Part 4: Opportunities To Enhance Your Return
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Bear Markets are Buying Opportunities
Since 1928, the S&P 500 has produced an average annual return of about 9.6%. This knowledge provides a compelling reason for including stocks in our long term financial plans. Further, we should welcome the opportunity of buying stocks when they go “on sale” during bear markets, because quality companies will weather recessions and continue to grow when the economy recovers.
How do we participate in buying stocks during a bear market? There are a number of ways; for instance:
- we can certainly utilize any cash sitting in our portfolio
- we can commit more cash contributions to our portfolio
- we can rebalance our portfolio through selling portions of our fixed income investments in order to increase the equities portion
Rebalancing is one of the 3 key practices for successful investing. For example, if our portfolio started with a designed allocation of 30% Fixed Income and 70% Equities, it may have become 35% Fixed Income and 65% Equities during a bear market because the Equities portion of the portfolio would have gone down in value. In rebalancing, we would sell portions of the Fixed Income until it gets back to its 30% allocation and use the cash received to buy more Equities until it gets back to its original 70% allocation. Doing this during a bear market ensures that we purchase stocks at a time of discounted pricing (buying low).
Buying for Higher Returns
When we buy stocks at lower prices, we reap the benefits of a higher dividend yield which results from the lower cost base. For instance, if stock ABC provides a $1.00 annual dividend, its yield would be equal to 5% if the stock trades at $20. However, if during a bear market the stock price drops to $16 while maintaining the same $1.00 annual dividend, its yield would increase to 6.25%, giving us a higher return on our investment.
Buying stocks at discounted prices during a bear market also positions our portfolio well for an eventual recovery in the market. Since we bought stocks at lower prices, we would capture a greater capital appreciation. This is why prudent investors welcome bear markets as a buying opportunity. Warren Buffet once said, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Buying at lower prices will enhance the returns on our portfolio. This is why we should view Bear Markets as a buying opportunity. In fact, we should embrace Bear Markets as prudent investors do, because buying stocks at discounted prices is a good way to achieve superior returns. As Warren Buffett puts it, “be fearful when others are greedy and greedy when others are fearful.”
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This article was prepared solely by Chad Ekren who is a registered representative of HollisWealth®, a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC). The views and opinions, including any recommendations, expressed in this article are those of Chad Ekren alone and not those of HollisWealth®. Capital Concepts and Capital Concepts Group are personal trade names of Chad Ekren. HollisWealth® is a trade name of Investia Financial Services Inc.