A bear market is defined as a market loss of 20% or more. As of mid-March 2020 we are in a bear market due to investors’ fears and speculations regarding COVID-19. This bear market decline is due to investors’ beliefs in the stability of the market itself, not changes in companies’ fundamentals.
A bear market is not by definition a recession. A bear market is undefined in duration vs a recession is defined as two consecutive quarters of negative growth.
Now, what does all this mean for yourself and other investors who are seeing red in their investment holdings right now?
Bear Market Investing Strategies
The next few weeks are likely to get worse before they get any better. These market conditions are a combination of COVID-19 virus and some poorly timed oil agreements. To simplify, the combination of these two issues created the perfect storm of demand and supply shocks to the oil markets which rippled through connected sectors.
The reality of a bear market is that given enough time they are inevitable, whether they are driven by economic factors or in this case global health. The key is to be prepared or at the very least not blind to the possibility.
For individual investors, this is where asset allocation and risk tolerance need to be considered. This bear market is a trigger to wake up investors that were asleep at the wheel and thought the upswing ride we’ve been on for the last 10 years would last forever. In times of uncertainty it’s challenging to stay calm. For any investor, seeing red on your statements can churn up emotions that can override rational and objective decision making. If you do see red, consider that i an expense for the future growth of your portfolio.
So, what now?
1. Build a Plan
If you came into this bear market without a written plan you should plan to come out of it with one. Whether you want to meet with a financial advisor, wealth manager or do it on your own. Start by writing down your goals and plans for your financial future. What are you trying to achieve? When do you need these funds? What type of risk are you able to sustain financially and emotionally? How long would you be comfortable to stay in a loss position? Answering these questions will help you get started and stay confident as you navigate the rollercoaster of your investing career.
2. Asset Allocation
If your investments were allocated properly going into this bear market you likely have nothing to worry about moving forward. Unfortunately, most people were overallocated in market equities and have thus seen significant declines in their balances.
Take this time to reevaluate your risk tolerance and time horizon to adjust your asset allocation across the appropriate securities available. Equity, Bond, Real Estate, Business, etc.
The goal is to build a properly diversified portfolio that has some negatively correlated assets that will perform well when the other performs poorly. That is the basis of modern portfolio theory. By adding different securities with varying correlations, you will not see every asset you hold head in the same direction at the same velocity. This allows you to take some comfort in knowing your portfolio is more secure than one anchored in market equities, which can behave like an umbrella in a hurricane.
3. Educate yourself
Are you working with a financial advisor or will you be doing the investing yourself? There is no right answer but make sure you are taking the time to educate yourself. You go to work every day to make and save money. Make an extra effort during this public health emergency to educate yourself on what is available and what makes sense for you. Focus on accounts available to you such as the TFSA, RRSP, and open plans. If you’re looking for a place to start, learning the most tax efficient way to invest is a smart move as saving 20% in taxes is usually easier than making 20% returns. Tax is one of the only constants in your investing career. You’ll pay tax the rest of your life, and your estate will usually pay it after it is over, so it’s a logical place to start.
Want to learn more about investing in today’s market or help defining your financial goals? Reach out to us to book an appointment.