I want to share a great analogy I heard recently, one that most Canadians can relate to…
Being surprised by a stock market crash is a lot like being surprised by the first snowfall of the season. It’s winter! It happens every year! We know this, and yet every year there are those people that throw their hands up at the first sign of snow, acting genuinely surprised. Like they never saw it was coming.
It’s the same when the markets crash, people act shocked even though we know bear markets are part of life. Much like winter for us Canadians. It’s coming, whether you like it or not.
Why talk about this now?
Seeing as the stock market is riding an 8-year long upswing (what’s called a bull market), and it’s finally spring, you might be wondering why I’m here talking about crashes and snow storms. For what it’s worth, I don’t like talking about snow in April anymore than you enjoy reading about it. But it’s a great analogy...
It’s important to talk about this because the best time to prepare for an inevitable downturn is now, not after it’s happened. Put your snow tires on before the first snowfall, right?
How to prepare for a bear market
You might be surprised (hopefully relieved?) to see that this article is pretty short. There are no model portfolios, no graphs riddled with acronyms that make your eyes cross. No quick fixes or foolproof stock picks. And most importantly, no jargon.
Because you don’t need any of that to be a successful investor.
If you’re a day trader betting your retirement on the success of Cannabis stocks then sure, you might want a few of those acronym-heavy graphs...
But for the rest of us?
It’s simple. All you need to do to prepare for a bear market—for any type of market—is make sure you have a plan.
You can’t predict the future
Here’s the thing, no one can predict the future. No one knows with absolute certainty when the stock market will go up or down and by how much. No one can tell you how much longer this bull market will last or when the next bear market will happen.
People spend a lot of time and money trying to figure this out, but in reality, that’s a crystal ball that doesn’t exist.
Understand what you can’t control...
One of the most important things you can do as an investor—and this applies to many areas of life—is understand what you can and cannot control. Get really honest with yourself about this and build a plan accordingly.
When it comes to the stock market, you’ll notice we don’t make any guarantees around here. We’re not ones to make crazy claims like, “Double your money!” or “10% return guaranteed!” We don’t try to predict the next hot stock or time the market. Because we know we don’t have control over any of these things.
Pretending you have control over the markets is like pretending you have control over the weather—you don’t! Nobody does.
… and what you can control
Here’s what we do know, at some point the markets will roll over. A bear market is inevitable. It’s just part of the cycle that’s been happening since the dawn of time (OK, since the dawn of stock markets).
This might feel scary, but successful investors know real money isn’t made during a bull market, it’s made by sticking it out long term through all the ups and downs. Bear markets included.
That’s why we suggest a passive approach to investing. We’d rather follow the markets by investing in ETFs than try to outsmart them by betting on the next Apple IPO, because the data overwhelming shows this approach tends to win in the long run.
Make your best plan
While you can’t control the markets, you can control how you’ll react to the ups and downs. That’s called having a plan.
You make your plan before you invest your money based on the variables you have control over—like what you’re saving for, when you think you’ll want to take the money out, and how sensitive you are to market fluctuations.
You make your best plan given what you know about yourself today and what you want for future you. You might want to check in on it every year, perhaps update it if something major changes like your income or you decide you want to leave full-time work earlier, but other than that it’s hands off. You make a plan and stick with it. Through thick and thin, ups and downs, in sickness and in health…. OK, you get the idea.
Tune out the noise
The whole point of making a plan is so you don’t have to follow the stock market. You don’t have to pay attention to all that manic market coverage. It’s just noise you can tune out knowing you’ve got a plan that will carry you through anything that comes your way.
So when the next bear market happens and you see your neighbour throwing up their arms, acting like they never saw it coming—like they’re seeing snow for the first time—you can smile and carry on with what actually matters. Living your life.