Strategies will help you survive bear market

Most market players have characterized the poor performance of North American stocks over the course of the last year as a bear market. Although investors can debate whether or not we are currently in the midst of a bear market, it is clear that the stock markets in Canada and the U.S. have been depressed for an extended period of time. Investors have been spooked by the repeated headlines of poor corporate earnings, large job cuts as well as lower consumer and business confidence. Also shaking investor confidence has been the hard and fast fall in the share prices of so-called "market darlings" such as Research in Motion (RIM-TSX), JDS Uniphase Canada (JDU-TSX), and Nortel Networks (NT-TSX). Most mutual funds, many of which hold significant positions in such former high-flying technology stocks, have also performed very poorly. So, outside of abandoning participation in the stock market altogether in the short-term, what steps or strategies can the average investor employ to ensure that significant investment returns continue to be achieved ? Here are a few tips which could help boost your returns over the coming weeks and months which will likely be characterized by continued above average volatility ...

- Review your portfolio and let go of losers. Few investment decisions conjure up more emotions than making the decision to sell a poorly performing stock. This emotional response has deep roots in the human psyche - we hate to admit that we have made a mistake. Instead, we prefer to struggle along with the investment in the hopes that time will eventually remedy our bad investment decision and reward us with a rally sufficient to recoup our initial investment. Unfortunately, this seldom happens as there is often a good reason for the stock's poor performance.

The key question, of course, is to know if the stock's poor performance is related to a lack of general market awareness, or whether there has in fact been a significant change in the company's underlying economic value. If the former is true, patience should eventually be rewarded. Generally speaking, a poorly performing stock should be sold as soon as it becomes known that there has been a significant impairment in its fundamental value. An impairment could be indicated by below expected financial results, substantial changes in variables which will have a material negative impact on the company's future operating results, or a significant deterioration in the financial position of the company.

- Downward averaging? Downward averaging generally involves the purchase of additional shares of a company as its price drops. Many investors advocate that this strategy lowers the average cost of their investment making it easier to achieve a gain when the stock bounces back. Many investors downward average several times on the same stock. This practice often places far too much reliance on the performance of one company and certainly compromises the benefits of diversification. A general rule that many successful investors follow is that no one stock accounts for more than 10 percent of their overall portfolio. Acquiring additional shares of a company, particularly where the reason for the decline is not clearly evident, may be considerably more risky than purchasing a new stock and creating a more diversified portfolio.

Al Budai, B.Comm., CGA is a Kamloops-based editor of several monthly stock research publications including Buy Low, Sell High ! He invites your questions and comments at CanStock.com.