At this time it's easy to be sucked in by headlines, become distracted and forget to focus on investment basics. It is exactly at these times, though, that it is most important to return to these basics.

As Warren Buffett wrote in the preface to Benjamin Graham’s Intelligent Investor:

"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight, or inside information … what’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

An investment framework is easy

Establishing a sensible investment framework is relatively easy. It simply requires the discipline to clearly define your investment goals, specific circumstances, time frame and ability and willingness to accept risk.

Most of these questions can be answered objectively and at a time of convenience (ideally, at a time free of heightened emotion). Assessing your ability to accept risk is more challenging. However, there are a range behavioural tools that can simulate how you are likely to react in stressful environments.

Assuming, you and your financial adviser have established a sensible investment framework, the second aspect is the more difficult part: sticking to it. This is never an issue when things are going well (or your assets are increasing in value), but is exceedingly difficult when all about is falling down.

Bear markets come in different shapes and sizes. They can be short and sharp or slow and lingering. (These are typically the most painful – ask any investor in the Japanese stock market during the 1980’s and 90’s.) Either way, they are normally based on some deterioration in economic conditions that is then magnified by sentiment. Often the second component, sentiment, has the larger impact.

Bear markets shatter investor confidence. Fear is extremely strong, stronger than the greed investors feel in bull markets. All the statements of long-term investing and empirical evidence in favour of equity investments, hold much less influence with investors who have just suffered a 25 percent fall in their investment with little prospect of short-term recovery.

What to do

What steps can you take, whether an individual investor, adviser or trustee, to weather future bear markets when they occur?

• Ensure that your portfolio is well diversified (both in terms of asset classes and within asset classes, particularly the equity portion) and in line with your framework.

  In the late stages of a bull market it is easy for investors to drift into holding too much equity simply because that portion has performed so well. Therefore, you should re-balance your portfolio regularly in a disciplined manner.

• Make sure that you are aware that the equity component of your portfolio will (not might) suffer sharp falls (30 percent plus) from time to time. This has happened seven times since 1960 or once every six and a half years!
• Understand that the reason for investing is a calculated risk to increase your real wealth over time.

  Long-term evidence (100 years) has shown the benefit of investing in riskier equity assets. R1 invested since 1900 has grown to over R95 000 compared to the R480 one would have received if invested in bonds (before tax!). This has come, however, at the expense of periods of extreme discomfort.

• Be aware that your investment manager is unlikely to see the bear market coming, and unlikely to avoid most of the fall. Timing the market is exceptionally difficult and requires getting the timing right twice (both when to sell and then when to buy back into the market). Very few professionals have been consistently successful at achieving this.
• Think long-term. Make sure that monies invested in equities are really available for the long-term, to avoid the risk of being forced sellers at inopportune times.
• Make sure that you select investment managers, who manage your monies sensibly with a focus on investing in quality companies that are well or reasonably priced.

  Companies that are particularly susceptible to bear markets are those characterised by high borrowings, whose growth has depended on share issuance to finance acquisitions, or whose success is closely linked to stock market conditions.

If you can prepare yourself in this way, it will be much easier to stick with the framework that has been set to achieve your investment goals.

A bear market is part of the ordinary market cycle, and however hard to believe at the time, is a temporary phenomenon. It represents the risk in "higher risk, higher return" and in fact provides buying opportunities for patient, rational investors.