There is so much talk about bubbles these days that it’s almost certain not to happen. It may be like the imminent recession of 2023, 2024 and 2025. Right or wrong, there’s one useful thing that comes out of all the speculation. You have no excuse for being unprepared when the bear market arrives.

In that vein, there are things you can do now that will prove invaluable when markets are weak. Indeed, most of the work needs to be done ahead of time.

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 be years away. And even when you get the sale right, you’re faced with 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 to do is eliminate the word ‘if’ from your vocabulary. Don’t sugar-coat the future by saying “if the market goes down.” This little word limits your ability to mentally prepare. It should be “when my stocks are dropping, when the headlines are ugly, and when it feels like my plan isn’t working.”

In SAM we trust: Rather than sell all your stocks, it’s time to make sure you’re at or near your strategic asset mix (SAM). SAM matches your portfolio to your life circumstances and personality. It’s a best guess at what mix of asset types, industries and geographies will help you reach your goals.

This step seems basic, but after a long run in the stock market characterized by huge disparities in sector returns (gold and technology versus telecom and health care), there’s a good chance your mix has drifted from where you intended. Your bonds, which provide income and crisis protection, are likely below target. Your stocks may be tilted too far toward the U.S. and technology.

A properly diversified portfolio won’t avoid a down market, but is assured of recovering in the years that follow.

Ask hard questions: If a bet on a particular theme or sector doesn’t work out, will it devastate your returns? When your $250,000 portfolio drops to $200,000 (down 20 per cent), will you be able to stick to your SAM? If you can’t confidently say yes, then you have the wrong mix (being fully invested in stocks works brilliantly as long as you have enough time and fortitude to stick with it).

Plan to spend: If you have coming spending needs (travel, kitchen renovation, university tuition), set the money aside in a money-market fund or GIC. This isn’t market timing, just sound financial planning. If the money needs to be there some time in the next three years, it shouldn’t be subject to the vagaries of the stock market.

Similarly, if you’re retired, make sure your spending reserve, the money you set aside to pay yourself, is topped up. You’ll be using it when your portfolio is down and bills need to be paid. We generally suggest maintaining the reserve at two years of spending until it’s called into action.

Automate your routine: Make your process automatic via monthly preauthorized contributions. A PAC is convenient and saves time, but it really helps in bad markets. It takes the emotion out of the process and ensures that you average down.

Implementation

When the ‘when’ comes, most of the work should already be done, but doing the right things when your portfolio is down is hard. Emotions are high and negativity is everywhere. Nothing heroic is required, but it’s still difficult sticking to your process under adverse conditions.

Keep making contributions: This is where the automatic thing comes in.

Rebalance: Use contributions (and withdrawals) to stay close to your SAM. The worst mistake you can make is being fully invested on the way down and partly invested on the way up.

Baby steps: Investing is never about perfection, and pursuing precision during difficult times can be especially debilitating. One way to loosen up is break your moves into smaller steps, none of which will be perfect, but all of which will be rewarding years later. As the saying goes, you make your money in bear markets. You just don’t know it until later.

It’s important to know what you’re going to do in bad times so you can sit back and enjoy the good times.