Stock Market Smarts: How to Deal with Investments in a Bear Market

Fingers crossed we’ve seen the worst, but don’t hold your breath. Here, what you need to know about investing in today’s market.

It’s been a dismal year for stocks so far. As of Feb. 24, all the major indexes in New York were down, many overseas indexes had posted double-digit declines, and the Toronto Stock Exchange had briefly dipped into bear market territory (a drop of 20 per cent or more from the previous high).

Fingers crossed we’ve seen the worst, but don’t hold your breath. Recent projections from the OECD have sharply reduced the outlook for the global economy this year and cut the projection for Canada to 1.4 per cent. If the forecast is correct, any market rebound may be short-lived.

That means a lot of good companies are selling at bargain prices but investors seem too spooked to buy. For a while, there was more than a whiff of panic in the air as fears grew 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.

A bear market is 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:

securityPrudence. 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.

Up next: Courage

courageCourage. It’s tough to stay the course when there is blood in the streets. The natural reaction of investors who see even big bank stocks tumble is to get out of the market at whatever cost. The result is often a fire sale of top-quality securities. The vultures love it! If you’re really brave, add to your positions in quality companies when they’re cheap.

Up next: Patience

patiencePatience. If you’ve put together a portfolio you are comfortable with, this is not the time to tear it down. You need to believe in yourself and stick it out.

 

 

Up next: Optimism

optimismOptimism. Every bear market eventually ends and a new bull begins. It has always happened in the past and it will again this time. And when the new bull starts, it is usually with a bang – think 2009. Remember that if the daily red numbers start to get you down.

 

 

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.