Do you walk away with the idea that investing is easy after reading investment blogs? That all you have to do is to invest the money and the returns will roll in on a regular basis in the form of dividends? In a way, I am guilty of this as I subconsciously relegate blog posts on how to survive a bear market to the back. After all, who would be interested to read blog posts such as "How to survive a harsh winter" when the season now is summer?
Investing is not always easy, especially during the depth of a bear market. No matter how vividly we describe the situation, it is difficult for the reader to appreciate it without experiencing one himself. I once have a colleague who remarked that my paper losses in stocks should not be painful, since the losses exist on paper only. One day, he bought into an Investment-Linked Policy (ILP). The ILP dipped 2-3% in value after a couple of weeks. He could not accept the paper loss and sold it off. Paper loss is real for those who experience it. Even when you just watch a crash happening without any money invested, the experience is very different from a crash you are directly involved in. Prior to graduation in 1998, I had watched several market crashes unfolding as I monitored my father's portfolio while he was working. I thought that experience would prepare me well for the crashes I would encounter when I start investing with my own money. Still, when the first crash happened during 2000-2003, I had to stopped monitoring my portfolio as the losses were too great to bear. Investing is not a bed of roses even though it might seem easy at some point in time. You can refer to Behind Every Successful Bear Market Recovery is A Cash-Like Instrument for a brief description of the situation during the Global Financial Crisis in 2008.
Even though bloggers who have experienced a market crash seldom blog about survival techniques in the bear market, a number of us have built in defences in our portfolios. The most common defence is keeping a war chest ready to be deployed when the market crash happens. Other defences include having a regular stream of cash that could be invested, such as an income and/or dividend stream. Yet others include diversification into different asset classes, portfolio rebalancing and Dollar Cost Averaging. I have written about such defences in Possibly The Worst Time to Invest. For a more technical discussion on risk management techniques, you can refer to A Comparison of Risk Management Tools & Strategies. Generally, based on past experience, simple defences such as keeping a war chest works better than more technical ones such as computing Value-at-Risk losses.
Also not always blogged about is the need to have adequate insurance and an emergency fund to cater for emergencies. It is not pleasant to be forced to sell off your investments at depressed prices to raise cash when emergencies happen. While we bloggers might not constantly blog about these things, they are some of the most important things to have before you start investing. To be able to reap the benefits of investing, you must first have a good defence.
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