Today I wanted to expand on one of my Top Ten Tips for Successful ISA investing and the tip in question is Tip 4: 'Park in cash during a bear market' (for more on my other nine tips, please just download our Top 10 Tips for Successful ISA Investing).
Your aim as an ISA and SIPP investor should be to profit in rising markets and protect in falling markets. This is not easy to do but is made easier when you understand how market cycles operate.
Bull markets vs a bear market
I’m a trend follower and market timer and my aim is to get in sync with the market’s direction. Rather than swimming against a current, I prefer to swim with it. A full economic cycle lasts about five years and consists of a bull market and bear market. A bull market is when the market forms an uptrend and a bear market is when the market forms a downtrend.
Bull markets can be seen as the ‘boom’ part of the cycle and the bear market can be seen as the ‘bust’ part. Your aim should be to ride the wave of the bull market and stay fully invested. This is typically a two to four year period. During this time, you don’t move into cash. Instead you stay fully invested in high quality investment funds and sit patiently in your investment funds until the bull market has run its course.
When the bull market ends, a bear market begins. This is when your investment strategy changes from ‘profit’ to ‘protect.’ 75% of investment funds move in the same direction as the stock market and if the market is falling (a bear market) most investment funds will drop irrelevant of their grade or manager status.
How and when to park in cash
This means investing against the market’s trend is dangerous. Investing in investment funds during a bear market is high risk. In bear markets, the best place to be is cash.
Here’s how it works: When a bear market takes hold, you move into cash. This gives full protection to your ISA portfolio. To guarantee that your full ISA account will be safe, use a cash park. The one I prefer is the Fidelity ISA Cash Park. Switching from being invested in a quality investment fund into a cash park is just like moving your cash from the stock market to a bank.
Bear markets are shorter in length than bull markets and tend to last 9-18 months. During this time you have to be patient and sit in cash until the bear market ends and a new bull market begins.
When the bear market is over, a new bull market begins and this is when you move back into quality investment funds.
By moving temporarily into a cash park when the market is falling, it helps to preserve and protect your profits made in the bull market periods.
It is possible for you to beat the stock market when it’s falling. In the 2000-2002 technology crash, I was extremely fortunate to make a gain of 26% compared to the FTSE 100’s 35.5% loss.
In the credit crunch crash of 2008-2009, I didn’t make a gain but my loss was not as severe as the general markets. My account dropped 9.7% compared to the FTSE100’s fall of 16.1%.
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