3 Keys to Surviving a Down Market Without a Scratch

Stocks that do well regardless of economic downturns, like Canadian National Railway (TSX:CNR)(NYSE:CNI), can be great picks in down markets.

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2018 is almost done, and it’s safe to say it’s been a bad year for the S&P/TSX Composite Index. Down about 10% year to date, the index has been getting pummelled since early October, and continues to lose points into December. Whether this market downturn will turn into a recession is anybody’s guess, but the fact that interest rates are rising in tandem with crashing equity and housing markets isn’t a good sign.

But that doesn’t mean it’s time to pull all your money out of the markets.

Far from it!

For investors with a long-term outlook, down markets can be great times to buy up quality stocks on the cheap. Just because a stock is down in the markets doesn’t mean the underlying business’s long-term prospects are any worse today than they were yesterday. But it’s important to buy wisely when you go bargain hunting, because some stocks fare better in recessions than others. The following are three points that should help you survive the current down market without a scratch.

1: Diversify wisely

Every investor understands the importance of diversification. But simply increasing the number of stocks you own isn’t always enough. You need to build diversified holdings within sectors that are likely to survive a down market. Simply buying an S&P/TSX Composite Index fund right now might not be the best idea, as doing so will give you a certain amount of exposure to weak sectors like real estate. Instead, you want to diversify within well-positioned sectors, such as rail transportation and discount retail.

2: Be a contrarian

“Buzzy” sectors are definitely not where you want to be in bear markets, as we can see clearly with what happened to U.S. tech stocks and Canadian cannabis stocks this year. Instead, you want to invest in low-key sectors that are less subject to the fickle decisions of speculators. Contrarian stocks like Canadian National Railway (TSX:CNR)(NYSE:CNI) can be great in this situation.

CN is enjoying phenomenal revenue and earnings growth, backed by the rising U.S. dollar and the company’s enviable position as a natural monopoly. Although this stock isn’t trendy or buzz worthy, it’s likely to do well in down markets–and indeed has fared better than the TSX average so far this year.

3: Keep an eye on the long term

Last but not least, when investing in down markets, it’s important to keep an eye on the long term. In a bear as protracted as this one, almost all stocks will fall at least a little. Although the aforementioned CN Railway has done better than the TSX this year, it’s still down about 1% year-to-date.

So you want to focus on stocks with impeccable long-term track records that you can count on to bounce back when the turmoil is over. Fortis Inc (TSX:FTS)(NYSE:FTS) has historically been one such stock, but with a highly leveraged balance sheet, it could be vulnerable to rising interest rates. The company has also been experiencing some earnings issues lately stemming from its Aitken Creek acquisition.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. CN is a recommendation of Stock Advisor Canada.

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