There is so much talk about bubbles these days that it is almost certain that this will not happen. It could look like the impending recession of 2023, 2024 and 2025. Right or wrong, there is one useful thing that comes from all the speculation. You have no excuse for being unprepared when the bear market arrives.
Along those lines, there are things you can do now that will prove invaluable when markets are weak. Indeed, most of the work needs to be done in advance.
Preparing doesn’t mean selling everything. That may seem like the obvious solution, but there’s a problem. Timing the market is impossible. The next bear market could start tomorrow or last for years. And even if the sale goes well, you face an even bigger decision: when to get back in? If you time the first decision poorly and miss a year or two of returns, the second becomes psychologically crippling.
So, what can you do?
Preparation
When not if: The first thing you need to do is eliminate the word “if” from your vocabulary. Don’t make the future brighter by saying ‘if the market falls’. This little word limits your ability to prepare mentally. It should be “when my stocks are down, when the headlines are ugly, and when it feels like my plan isn’t working.”
In SAM we rely on: Instead of selling all your stocks, it’s time to make sure you’re at or near your strategic asset mix (SAM). SAM tailors your portfolio to your life circumstances and personality. It is your best guess as to which mix of asset types, sectors and regions will help you achieve your goals.
This step seems simple, but after a long run in the… stock market Characterized by huge differences in sector returns (gold and tech vs. telecom and healthcare), chances are your mix has strayed from where you intended it to be. Your bonds, which provide income and crisis protection, are likely to remain below target. Your stocks may be too tilted towards the US and technology.
A well-diversified portfolio does not avoid a downward market, but is assured of recovery in the years that follow.
Ask difficult questions: If a bet on a particular theme or sector doesn’t work out, will it destroy your returns? When your portfolio drops from $250,000 to $200,000 (a 20 percent drop), can you hold on to your SAM? If you can’t confidently say yes, then you have the wrong mix (being fully invested in stocks works great, as long as you have enough time and determination to stick with it).
Plan to spend: If you need upcoming expenses (travel, kitchen renovation, college education), set the money aside in a money market fund or GIC. This is not market timing, just sound financial planning. If the money is to be there sometime in the next three years, it should not be subject to the whims of the stock market.
If you are retired, also make sure that your spending reserve, the money you put aside to pay yourself, is replenished. You use it when your wallet is empty and bills need to be paid. In general, we recommend keeping the reserve at two years of expenditure until it is put into action.
Automate your routine: Make your process automatic through monthly pre-authorized contributions. A PAC is convenient and saves time, but really helps in bad markets. It takes the emotion out of the process and causes your average to drop.
Execution
When the “when” comes, most of the work should already be done, but it’s hard to do the right things when your wallet is down. Emotions are high and negativity is everywhere. It doesn’t take anything heroic, but it’s still difficult to stick to your process under adverse circumstances.
Keep contributing: This is where the automatic thing comes into play.
Rebalancing: Use contributions (and withdrawals) to stay close to your SAM. The biggest mistake you can make is fully investing on the way down and partially investing on the way up.
Small steps: Investing has never been about perfection, and chasing precision in tough times can be especially grueling. One way to loosen up is to break your movements into smaller steps. None will be perfect, but all will be worth it years later. As the saying goes, you make your money in bear markets. You just don’t know until later.
It’s important to know what you’re going to do in the bad times so you can sit back and enjoy the good times.
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