KEY POINTS:
It's easy to be an investor when the markets are booming - bull markets make everyone look good.
A rising tide covers all of our defects and, as Warren Buffett says, it is only when the tide goes out that we see who has been swimming naked.
The past 100 years has seen three major bull markets. Each has been followed by a protracted bear, also known as a downturn, market.
These bear markets have lasted on average nearly 20 years. We are eight years into a bear market - it would be fair to say that this bear started with the dot.com crash in 2000.
So, now we are stranded naked with not much water around us, what should we do?
Should we all rush to the bushes and hide, promising never to go near the water again for a decade or more?
That would be a mistake. Bear markets are long and hard, but they do give good opportunities.
They are not all about falling. In fact, if you look at a graph of a typical bear cycle, you see that after a major fall, the line goes broadly horizontal for some years. As it moves sideways, there are ups and downs which present opportunities to both buy and sell.
To take advantage of these opportunities, you need skills and discipline - things that were not necessary while the bull roared but are essential now.
These are skills of valuation and knowing that the most important aspect of an investment is the income which can be derived from it.
No longer will capital gain come easily and make up the bulk of your investment returns.
Now, as we work through the years of flat markets, we have to assess investments by their income and regard that income as our primary return.
All investments owe their worth to the income that comes from them - interest for bonds, rents for property and profits and dividends for shares.
Income gets forgotten in the wild frenzy of a boom - you can buy just about anything and make money.
However, the bear brings us back to (and the fundamentals are that quality investments have quality income) income that is sustainable, predictable and growing.
At the moment, markets are too volatile to invest in. But one day soon they will calm down and the volatility will subside. That's when I will re-enter the water and start to invest.
During the next decade or so of bear markets, most of your investment return will come from dividend yield and rental yield. There will be some capital gains to be had but much less than during the bull market - you will have to search for yield to compensate.
What has happened in the past is no guarantee of the future - but it is not that a bad pointer.
If this bear market is like past ones, savvy investors will brush up on the fundamentals of investment - when the tide is out, you cover yourself by valuing investments appropriately.
Each week best-selling financial author Martin Hawes will share his strategies to help you grow your wealth. You can email your personal finance questions to info@wealthcoaches.net or andrea.milner@heraldonsunday.co.nz
