How investors can preserve their assets in a bad market

This has been a tough year for equities. The share market is officially in a bear run — losses beyond 20 per cent — and nobody knows when the trend will turn.

As the southward march goes on several counters, which are now trading at or near 52-week lows, could mark newer lows.

Though immediate cyclical price floors can be found at the 3,000 point level, it remains to be seen whether this level can withstand the selling pressure.

Seeing that the election fever is starting to infect the market (volatility has been on an upward trajectory), it’s possible that prices could easily blow past their previous supports.

In light of this, I share three ways investors can re-jig their portfolios for better protection and performance.

First, investors need not to be scared of cutting losses. Granted, liquidating one’s portfolio when in losses is not an easy task but it is the only way (yet-to-be launched index futures would have been a more cost-effective way) to hedge against further losses. 

Instead of “tying” capital in a losing asset, investors are better protected reallocating into a short-term yield generating security such as treasury bills.

Though treasury bills (currently at 8.6 per cent) are trading below their long-term average of 10 per cent, they are better-off compared to an asset that has now lost over 40 per cent of its value since January 2015.

Since no one knows when the tide will turn, treasuries offer the best shelter for investors in the current season.

Secondly, if one dislikes the idea of tactically retreating out of equities, the only choice left is to hold the portfolio for the long term. That notwithstanding, one will still need to separate the “good” apples from the “bad” ones.

In other words, the investor will need to exit stocks that do not show much promise in the long run, i.e companies laden with debt, comparably lower returns on shareholder funds over the past seven years, sagging sales, dwindling free cash flows et cetera.

When prices improve

On the high-probability stocks, one can better their individual allocation; say three to seven per cent, complete with stop losses. Any violation of these should warrant a move to cash until when prices improve.  

Finally, if one hates the idea of either exiting or sifting stocks then leaving the portfolio untouched is the way left.

Though not the most optimal, here the investor will have to rely on time to recoup whatever losses and possibly make some gains.

With this option, the investor can only hope that the cyclical nature of shares will at some point in the future help their portfolio float back up. Investors unsure about timing are best suited to follow this approach.

With the New Year just three days away, investors can determine what choice to take. Though the share market has remained weak, one can still outperform with a little re-jig.

Moreover, perhaps forgetting what is behind and aiming ahead to achieve one’s goal should be the all-important focus. Keeping such a view on things is vital as we prepare to face an uncertain New Year. 

Mr Mwanyasi is MD, Canaan Capital Limited Capital