Getting Ready For A Bear Market – Part Deux
David Christianson, CFP, R.F.P., TEP
I had a dilemma recently, over the Thanksgiving Weekend. That’s normally a time to reflect on all the great things we have by virtue of living in Canada. Some of us chose to be here, and many people overcame challenges and adversity to make this country their home.
Many of us, though, are just plain lucky. By virtue of our fortunate accident of birth, we happened to end up in a peaceful democracy where the standard of living, looked at in all aspects, is the best in the world.
The economic situation and stock market declines this past month are what appeared to present me with a quandary.
While I strongly believe everything I just said about Canada and how fortunate we are to live here, and I fervently believe that all of us are healthier, happier, more productive and make better choices in our lives when we say out loud the list of things for which we feel thankful, I have an obligation to point out that things are not good in my area of the world.
Maybe there is no dilemma. Maybe we can reconcile this apparent dichotomy.
Last week we asked if you were ready for a bear market, because one may be upon us. There is now no doubt.
After one of the worst stock market months in living memory, the Toronto index fell about 28% in the last month and is now down over 40% from its peak in June. The recent declines have been led by commodity stocks, including oil companies, and market darlings RIM and Potash Corporation of Saskatchewan. These last two stocks had become a huge part of the index, in the style of Nortel in 2000, and their price collapse has therefore had a disproportionate negative effect.
Ironically, if you were invested exclusively in Canadian banks in the last month, you did much better, as all of them outperformed the market as a whole. Royal and Scotiabank shares are “only” down 5% in the last month. The irony is that it is the problems with banks in the rest of the world that is causing much of this crisis.
In my last article, I exhorted you to get ready financially and psychologically for a bear market, as I have several times over the past ten years.
I also pointed out that the stock market returns in the first year after a bear market have ranged from 15% to 25%, and often these increases took place while the economy was still officially in recession.
When I said that the certainty of bear markets was not a reason to avoid investing in equities, some people took that to mean always buy-and-hold. Rather, my point was that you have to be prepared for the certainty of bear markets, by having some of your money NOT invested in equities.
You need to keep a cash reserve for emergencies, you need to keep cash and guaranteed vehicles available to fund capital expenditures, and you need a portfolio that produces the income you need, without having to rely on selling stocks at a profit each year.
You need to have investments that are likely to rise in times of uncertainty or recession, like bonds, so you always have something that is up when you need money from your investments.
In my judgment, an economic slowdown and official recession are almost certain, with the sudden tightening of the easy credit to which our system has become addicted.
Now, more than ever in recent memory, you need to look at what you spend. Examine every choice you make and, especially, every spending habit into which you have fallen. Make sure that every dollar YOU spend is YOUR conscious choice. Research ways to get what you want for less, and make the necessary effort to follow through. Start demanding more value for your hard-earned money.
Oprah had “the thriftiest family in America” on her show October 8, and you can get those tips at Oprah.com. Here is a time we can learn from our southern neighbours, who are reeling from 30% drops in house prices, foreclosures, layoffs and well-grounded fears about their futures.
Even with a much tighter belt, you will still find lots for which to be thankful.
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This article originally appeared in the Winnipeg Free Press on Friday, October 10, 2008.
David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column, ‘Dollars & Sense’ appears Fridays in the Winnipeg Free Press.