Riding the bear

14 March 2023 – Bear markets are devious beasts, generally sneaking in to ruin the picnic after periods of strong economic growth and wealth creation.

While we know that financial markets rise over the long term, history tells us that this journey is far from smooth and includes periods of sharp downturn. When the going gets tough, it’s critical to avoid making short-term mistakes that can unseat long-term financial goals.

Here are five investment strategies to help investors ride the bear:  

Spread the safety net. While most financial assets tend to sink in a bear market, there is always a spectrum of losses: therefore, diversifying portfolio investments will help to shield an investment portfolio from the worst. Ensuring exposures are spread across a number of asset classes, sectors and geographies (e.g., through model portfolios) will decrease risk: we may even find that some traditionally defensive assets like bonds start to rally. We should also bear in mind that cash can be an attractive asset: sleeping well has particular value during worrying periods.

Rebalance the ride. Buy-and-hold strategies work over long periods. Having said that, a bear market is commonly a forward signal of a transition between phases of the economic cycle e.g. expansion moving into slowdown. The simple act of rebalancing portfolios during market downturns can increase the compounding effect of returns, as one takes profits on the defensive winners and adds to the short-term underperformers, while also resetting to the preferred asset allocation.

Keep calm and stay in the saddle. Some folks joke that shopping is investing, but for some quality goods it may be true. When we see discounts on items we’ve been wanting to buy we don’t suddenly question their quality, we see it as a win-win because we can buy more for less. We should take the same approach with investing – if a quality company is trading at a significant discount we should consistently buy that company over time. This approach, commonly referred to as dollar cost averaging, helps reduce our average entry price and is a proven method to build wealth over lifetimes.

Look for a hedge. Some market events justify the addition of defensive allocations. This can be attractive in a number of situations, including during pension phase, after a strong run in markets, or when yields within defensive assets like bonds or dividend-paying stocks are elevated. If an investor is on track or even ahead of their investment goals, then adding to appealing hedges can be beneficial.

Remember (& review) the destination. Whatever the investment strategy, remember that bear markets tend to be short-lived in relation to investing timelines. In fact, since the 1940s US bear markets have averaged less than a year in length. The longest lasted 31 months following the bursting of the bubble; and even that bear market was an outlier, lasting 50% longer than anything witnessed in the previous 50 years. Knowing that time is on one's side means bear markets are often a great time to schedule a review with your advisor to ensure you are still on track with your long-term goals.

Do you have other tried and trusted bear market strategies? Please email me here and I’ll keep the conversation going.

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