Stock Smarts: Coping with Bear Markets
They’re the hardest time for all investors. Here are four qualities you need to get through them.
“Some of your recommendations seem to be getting hammered exceptionally hard,” a newsletter reader wrote last week.
He’s right, of course. But so is the whole stock market as investors flee risk. We all know the old investing axiom: A rising tide lifts all boats. By the same token, a falling tide lowers them all.
As of the time of writing, the S&P/TSX Composite is down 4.8 per cent and is in bear market territory, off 20.3 per cent from the 52-week high of 15,527.75 that was reached last spring. In New York, the S&P 500 is down 8.8 per cent for 2016 and 12.6 per cent from the 52-week high of 2,134.72.
With a few notable exceptions, just about every market sector is down this year. Only gold stocks, up 39.4 per cent as of this writing, have bucked the trend.
That means a lot of good companies are now selling at bargain prices but investors are too spooked to buy. There’s more than a whiff of panic in the air as fears grow of another 2008.
Conditions today are nowhere near as grave as they were then, but investor psychology and market momentum can create a perfect storm that can drive indexes down much more than rationality would dictate. That may be what we’re experiencing now.
It’s the most difficult time in any investment cycle and coping with it requires four qualities that are often difficult to muster in these situations. They are:
Prudence. Good portfolio construction is critical in these periods. The older you are, the higher the percentage of your assets that should be held in fixed-income securities like GICs, bonds, and the funds that invest in them. I have repeated this so often that everyone must be sick of reading it, but I don’t apologize. Too many people still have a higher equity weighting than is prudent in their circumstances. If you’re in that situation, start the rebalancing process now.