Special to the Globe and Mail
by Tom Bradley
It feels pretty quiet. There’s nothing big going on in business news. Market volatility is very low. Interest rates and the loonie are staying in a narrow range. In times like this, there are two things investors can do: Enjoy it while it lasts and get ready for when it’s not so quiet.
On the latter, our firm recently set time aside to get ready for the next downturn. It might seem out of step with the benign market conditions, but as I said to our team, we have no excuse for being unprepared. Bear markets are a necessary and unavoidable part of investing. It’s not a matter of “if,” but “when.”
Before you tune out, you should know that the best time to do this kind of preparation is when markets are calm and returns are positive. The biggest mistakes occur when changes are made at frantic tops and scary bottoms.
Here are the conclusions from our session.
Positives hard to find
Down markets are never quiet and are guaranteed to feel lousy. The headlines will be filled with disappointing economic data, earnings disappointments and cancelled mergers. Doom and gloomers will have the spotlight.
If the downdraft is severe, nothing will escape the carnage. Speculative securities will be crushed, and even high-quality stocks will take a hit.
There will be little attention paid to valuations, at least initially. I learned this the hard way. I was a stock analyst on Black Monday in October, 1987, and remember being upset when none of our institutional clients wanted to hear about a stock trading at a low price-to-earnings multiple. They were in survival mode.
Indeed, when the bear arrives, many investors will be unprepared because memories are short. Consider our current situation. We’re experiencing one of the best and longest bull markets in history. It’s easy to forget about the other side of the equation.
As investment professionals, we know our calls and meetings with clients will be tougher. It’s an emotional time. Most clients will be disappointed and/or scared. Some will question why we didn’t avoid the downturn. It’s the point in the cycle when the gap is the widest between what clients expect and what investment professionals can do.
When markets are down, everyone becomes an economist. And a confident economist at that. The late Peter Bernstein, a financial historian, said it best: “In calmer moments, investors recognize their inability to know what the future holds. In moments of extreme panic or enthusiasm, however, they become remarkably bold in their predictions.”
With this big picture focus comes a shorter time frame. Investors feel the need to be more exact in timing purchases, transfers and withdrawals. This precision has the effect of freezing many people, preventing them from taking positive action.
You need to be prepared for the next downturn. It’s very different from today. You’ll feel beaten up and your plan won’t appear to be working. Knowing that, I have some suggestions on how to get ready.
First, print this article and put it somewhere you can find it a few months or years from now.
- Have a good sense of what you want your long-term asset mix to be (cash, bonds and stocks). It doesn’t change much over time, so it will provide you with a baseline when your portfolio gets out of whack.
- Mentally rehearse what you’re going to do when your account is down 10 to 15 per cent. You’ll want to maintain your regular contributions or possibly accelerate them. You’ll undoubtedly need to do some rebalancing.
- Freshen up your target list for securities and funds you want to purchase or add to. Pay attention to valuations.
- And finally, make sure you know who you’re going to lean on when you need a steady hand.
Bear markets are not a cheery topic, but they’re a necessary part of investing. Without exposure to risk and volatility, it’s impossible to generate adequate returns. And of course, for investors who have a long time frame and are building their wealth, it’s a time to look forward to. After all, they’re buying, not selling. Lower stock prices are a beautiful thing.
We're not a bank.
Which means we don't have to communicate like one (phew!). Sign up for our blog to get the straight goods on investing.