How to brace your­self for the in­evitable mar­ket down­turn

Waterloo Region Record - - Business - DAVID PADDON

TORONTO — No­body can pre­dict with ac­cu­racy when stock mar­kets will end their record­set­ting bull run, but the best way for in­vestors to deal with the next down­turn is to re­main calm and stick to a well-crafted plan.

The cur­rent U.S. bull mar­ket be­came the long­est on record as of Aug. 22, 2018, prompt­ing many mar­ket ob­servers to won­der when the party will come to an end.

“The very na­ture of these down­turns is that they hap­pen by sur­prise, so you re­ally can’t an­tic­i­pate when they’ll hap­pen or why they’re go­ing to hap­pen,” says Lisa Kramer, a fi­nance pro­fes­sor at the Univer­sity of Toronto’s Rotman busi­ness school.

As a re­sult, Kramer says it’s im­por­tant to know your own abil­ity to tol­er­ate a po­ten­tial loss within a spe­cific time pe­riod.

One strat­egy is to imag­ine hav­ing your stock portfolio drop by a spe­cific num­ber of dol­lars — such as $3,000, or $30,000 or $300,000 — within the com­ing year.

“To think about their portfolio mi­nus that big num­ber is pretty vis­ceral as ex­er­cises go,” Kramer says.

She ad­vises speak­ing with a good fi­nan­cial ad­viser who can ex­plore the pos­si­ble range of in­vest­ments that fits best with your in­di­vid­ual cir­cum­stances.

“A re­ally dili­gent ad­viser will go a step beyond that ... and help the client un­der­stand them­selves.”

Among the key fac­tors to con­sider: when the money will be needed (known as an in­vest­ment hori­zon), your age, oc­cu­pa­tion and ex­pe­ri­ence as an in­vestor.

Moshe Milevsky, a pro­fes­sor of fi­nance at York Univer­sity’s Schulich busi­ness school, says an un­der­stand­ing of the in­di­vid­ual’s in­vest­ment hori­zon is an es­sen­tial first step in de­ter­min­ing how to pre­pare for a stock mar­ket down­turn.

“If you’re con­cerned now about where the (stock) mar­ket is, maybe tilt your as­set al­lo­ca­tion slightly — and I mean slightly — to­ward fixed-in­come (in­ter­est­bear­ing in­vest­ments such as bonds).”

He adds that oc­cu­pa­tion is an­other im­por­tant con­sid­er­a­tion, be­cause some people have steady in­come that will likely carry them through a down­turn while oth­ers have more er­ratic pay or a type of work that would suf­fer in a re­ces­sion.

What’s not help­ful: pre­dic­tions about what’s to come.

“Mar­ket tim­ing could be very costly,” says Ari Pan­des, an as­so­ciate pro­fes­sor of fi­nance at the Univer­sity of Cal­gary’s Haskayne busi­ness school.

“Left to our own de­vices, there is that bias that you push the panic but­ton and end up sell­ing at the wrong time be­cause you think the world is fall­ing apart.”

The last time the stock world “fell apart” was a decade ago, start­ing a few weeks after New York-based Lehman Broth­ers filed for bank­ruptcy on Sept. 15, 2008.

Although it wasn’t known at the time, the three ma­jor U.S. stock in­dexes were about to em­bark on a six-month free fall that would even­tu­ally wipe out more than 40 per cent of their value by mid-March 2009.

Other mar­kets, in­clud­ing Canada’s, shared the pain. The S&P/ TSX com­pos­ite in­dex dropped 38 per cent by March 9, 2009. Since then, Canada’s main stock bench­mark has re­cov­ered, mov­ing nine per cent past its pre­cri­sis high.

Dave Nu­gent, head of in­vest­ments for Toronto-based Wealth­sim­ple, says in­vestors shouldn’t be spooked by his­tor­i­cal facts like the fall of Lehman Broth­ers be­cause they don’t pre­dict the fu­ture.

“Yeah, we’re head­ing into the 10th anniversary but there’s been talk about a cor­rec­tion for the last cou­ple of years and (the mar­ket) keeps go­ing higher.”

As a re­sult, Nu­gent says, one of the big­gest ser­vices pro­vided by Wealth­sim­ple — a robo-ad­viser with about 100,000 clients — is to help them re­main dis­ci­plined in­vestors through good times and bad.

“It’s some­times hard to take some money off the ta­ble when mar­kets are higher and al­lo­cate it to more con­ser­va­tive in­vest­ments,” Nu­gent says.

“On the flip side, it’s very dif­fi­cult to pull the trig­ger and add to stocks when the mar­kets are in free fall.”

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.