Investing During a Market Downturn

The market is wonderfully predictable... in the long run. In the short run, however, anything can happen. Even though we know we should expect tough times when investing, it’s human nature to feel panic and uncertainty when market conditions aren’t so rosy—like they are in our current market. It’s easy to fall into the trap of thinking “This time is different,” when the reality is that it’s not. So what is the smartest way to survive a market downturn?

It’s All About Perspective

Before you get too focused on this year’s falling stock prices, remember that the stock market returns over the past decade haven’t just been good, they’ve been the best of all time. An entire generation of investors has yet to experience the emotional challenge of a bear market. A bear market occurs when there is a market decline of 20% or more for an extended period of time. By “market,” we mean the S&P 500, a collection of the 500 largest individual stocks on the U.S. market, considered by many the key measure of market performance given that the U.S. makes up two-thirds of the broader stock market.

The S&P 500 has experienced approximately 26 bear markets since 1928. These downturns tended to arrive, on average, once every 3 to 4 years, and they would last an average of 289 days. Over the same period, there have been 27 bull markets (when stocks rise by 20% or more after declines), which last closer to 991 days. The takeaway? You will experience many bull and bear markets over your investing career, but most days in the market are good ones. That’s why we don’t throw our hands up and sell everything when things don’t look great (especially because holding cash is the only way to guarantee you won’t make any money).

So what do you do instead?

The market over the past three years

The market over the past 30 years with the past three years highlighted in yellow.

Data via MacroTrends

How to Invest When the Market Is Down

Revisit Your Goals

First, there’s no single universal tactic for what to do when the market goes down, because not everyone is in the same financial situation. It really depends on what you need to use your money for. If you’re investing for the short term (between 0 and 3 years), you are, essentially, gambling. Why? Because we never know when we might see a bear market, and because a bear market can last a year or more, so you run the risk of having your entire investment timeframe in a bear market. For such a short period, stick to the “boring” stuff, like high-yield savings accounts.

Now, if you’re saving for the long term (8+ years), you’d be wise to do... absolutely nothing. On one condition: You’re diversified.

Diversification

Putting all your eggs in one basket is a recipe for disaster in many areas of life, but especially your stock portfolio. Your portfolio should comprise a wide range of companies from different sectors, regions of the world, and types of assets. If you hold only Canadian bank stocks, U.S. tech stocks, or just bonds, you’re doing yourself a disservice and making your investment journey a bumpy one. Diversify your assets with tools like ETFs (exchange-traded funds) or mutual funds, or take advantage of one of the many online automated investing services, so you don’t have to worry about it yourself. And don’t stop with stocks; consider private assets like real estate investment (not that we’re biased). A diversified portfolio is your best long- term protection against market volatility.

Don’t Trust Your Gut

Usually it’s best to trust your instincts when making an important decision, but as investors, we often need to teach ourselves to do the opposite of what feels comfortable. In a bull market, it feels like anything will make money; we feel confident and are more inclined to invest. But in the midst of a crash or a longer-term bear market, we feel more protective of our funds; we default to protecting our assets. An intelligent investor will do the opposite of what they might want to do: stay disciplined when markets are up, and take advantage of opportunities when markets are down. As Warren Buffett says, “Be greedy when others are fearful.”

Do Not Time the Market. Don’t Even Try.

So... couldn’t someone just skip the down markets? How hard can it be to take money out before things get bad and then put it back right before things get really good again? Trying to do this is called timing the market, and it’s tempting when you feel your emotions taking over. The reality is that it’s basically impossible to time the market. Unless you have a crystal ball lying around, these are tough calls to make, and even the pros can’t do it (think a team of 20 Harvard MBAs with dozens of certifications, six monitors, and all the research in the world).

There’s an old saying that time in the market is always better than timing the market. It was probably Warren Buffett who said it, too (when in doubt, assume investing quotes are all Warren Buffett). Even if you were the worst market timer in the world (like Bob who invested his money just before all of the modern stock market crashes), you’re honestly better off losing your investment account password than trying to time the market.

Protect Your Future Self

Still feeling stressed? Consider adding assets to your portfolio that act a little differently than stocks. Traditionally, this has meant bonds, but these days more people are moving into alternatives like real estate and industrial holdings. The trouble with these options is that they’re typically extremely expensive, and not many people can access them.

Real Estate Is the Ultimate Hedge

Bear markets happen for any number of reasons. Geopolitical instability (like wars) and economic shifts (like interest rate changes) are often the cause, and this bear market is no exception. You can add some stability to your investment portfolio by investing in defensive sectors, but a high-inflation economic environment poses other challenges. The current inflation across North America is a reminder that including inflation hedges (assets that tend to move up with inflation) in your portfolio is vital. Many people view gold and real estate as traditional hedges, and here at Willow, we’re partial to the real estate offering for a few reasons.<

Real estate provides rental income, meaning you make money every time your tenant pays, but also in the building itself, which appreciates in value as time passes. The good news about rents is that you get the opportunity as a landlord to increase them when your bills are rising too, meaning that if inflation goes up, so does your income. Commercial real estate is especially enticing, because with more units (multi-residential) and companies taking out space (retail or mixed-use), you also further diversify your income. It doesn’t hurt that direct commercial real estate was down by only 5.7% in 2008 compared to Canadian REITs, which were down by 43.4%. The trouble is, most commercial real estate is owned and controlled by large institutions and isn’t a realistic investment opportunity for regular Canadians. Until now.

Willow

While REITs and other privately managed real estate funds have been around a long time, they don’t allow you to personalize your portfolio or own the real estate directly (at least not without high minimums and a hefty price tag). Willow has brought commercial real estate to the masses and enables investors to add the alternative to their portfolio. Incorporating a percentage of your portfolio into alternatives might be just what your portfolio needs during times like this. Having assets that pay you for doing nothing is also an incredible first step towards building financial independence long term.

Conclusion

So before you let clickbait news of plummeting stock prices get the better of you, take a deep breath. Review your goals and investment strategy, and make sure you’re well-diversified with your holdings. If you need some support, call a licensed professional whom you trust for investment advice. With confidence that your portfolio can withstand whatever market turn comes next, you can sleep easy while your money does its thing.

Speak with us

4 sources listed in this article

• https://seekingalpha.com/article/4483348-bear-market-history
• https://www.macrotrends.net/2324/sp-500-historical-chart-data
• https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/
• https://institutional.rbcgam.com/en/ca/documents/en/common/article/ real_assets_introduction_to_core_commercial_real_estate.pdf? language_id=1