Ask Colin

Why don't you use a bear fund to trade bear markets rather than standing aside in cash?

The detailed question was:

I am a member of your site and have read your latest two books and are in the process of finalizing my own investment plan to move forward with.


I have a question regarding the iShares Bear fund (BEAR.ASX). Do you know much about this and would you ever consider using this option at the times where you are normally completely out of the market, rather than sitting in cash so you may continue to obtain capital growth. I am yet to establish if and what dividend it pays.


I don't know much about ASX SPI Futures so will need to do some reading up on what this is about but I am interested to here your thoughts around this fund and any risks associated with it. 


I don’t know anything about this instrument, I am sorry.


My strategy in bear markets is to stand aside. The long bull market will have been a time of work and bear markets are a time for a break, do more reading and research and be ready for the last phase of the bear market. The time out of the market varies from six to eighteen months at the most (twice that long  in my lifetime) in my experience.


As an investor, I am looking to buy part ownership of a business and enjoy a growing income stream, which is reinvested in the market. If the businesses are successful, there will also be capital growth over time, but as I have shown in many presentations this year, the big wealth growth comes from reinvestment and compounding of the income stream (dividends and franking credits). This slide (you will have seen it on the members website?) from my talk in Auckland two weeks ago explains it:



So, while your focus as a trader on capital growth from the share price is important, the main game is preservation of capital and then compounding the income stream from the business.