Stay the Course: Why Panicking in a Bear Market Could Cost You

Stay the course. Stay invested based on your risk tolerance and long-term financial goals. Maintain a diversified portfolio.

| More on:
man touches brain to show a good idea

Source: Getty Images

The stock market has been oscillating up and down in a sideways channel. The general idea is to buy the dip, but it may be easier said than done. Some folks like to stay the course and average into their stock positions over time whenever they have extra money coming in that they don’t need for a long time.

If you have been buying stocks year to date, chances are that some of your positions are in the red. Particularly, some stocks sensitive to higher interest rates have been hit harder, including real estate investment trusts (REITs) and utility stocks.

The Canadian bank stocks have also performed worse than the market, as the economic outlook has been more negative with higher interest rates that are dampening economic growth. In fact, some economists believe we’re heading for a soft-landing recession by 2024.

The chart below illustrates the year-to-date price action of the Canadian stock market using iShares S&P/TSX 60 Index ETF (TSX:XIU) as a proxy compared to the respective exchange-traded funds (ETFs) that represent the Canadian banking, Canadian REIT, and Canadian utility sectors.

XIU Chart

XIU, ZEB, XRE, and XUT data by YCharts

Even the cushion from the relatively high cash distributions of these sectors was not sufficient to cover the (temporary) price loss. Yes, the emphasis is on the temporary price loss. Assuming you bought units in the ETFs or shares in quality businesses in the sectors, the stock price should come back eventually.

XIU Total Return Level Chart

XIU, ZEB, XRE, and XUT Total Return Level data by YCharts

Investors have to be patient. In the worst-case scenario, for a more sustainable rally, one might have to wait until the Bank of Canada sees it necessary to cut the policy interest rate to boost economic growth in a bad recession. This is why it’s so critical to only consider investing long-term capital in the stock market as well as target to buy wonderful businesses at good valuations.

The utility ETF, iShares S&P/TSX Capped Utilities Index ETF, has been the worst performer year to date. If investors sell at a loss now or worse, in a bear market, they lose out. It could take a long time to recover one’s losses. Notably, it might be a bad idea to add to your worst losers. You might think you’re buying on the cheap, but the worst losers are probably trading cheaply for a reason.

The best thing to do is to stay the course — that is, stay invested according to your risk tolerance and long-term financial goals. Today, investors are probably leaning towards risk-off investing to prioritize capital preservation and weighing more in lower-risk investments, including cash, quality bonds, and low-risk stocks.

Low-risk stocks include those that trade at reasonable valuations and continue to deliver earnings or cash flow growth. Of course, those that also pay out nice dividends provide an extra layer of safety for investors. The key idea is to stay the course and invest in a diversified portfolio. A diversified stock portfolio would include a basket of stocks from different sectors and industries that are exposed to different risks.

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 Kay Ng has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Investing

grow dividends
Dividend Stocks

2 Unloved TSX Dividend Stocks That Could Soar in 2024

These top TSX dividend stocks look cheap right now.

Read more »

TFSA and coins
Dividend Stocks

3 TFSA Stocks I’m Eyeing for My 2024 Contribution

In 2024, I'll be adding dividend stocks like Brookfield to my account.

Read more »

Dice engraved with the words buy and sell
Bank Stocks

TD Bank Stock: Buy, Sell, or Hold?

TD Bank has been hit with negative earnings momentum and rising provision for credit losses, making TD Bank stock a…

Read more »

TFSA and coins
Dividend Stocks

Canada Revenue Agency: 1 Crucial TFSA Change You Need to Be Aware Of

The TFSA contribution limit is out for 2024 and has increased to $7,000, raising the cumulative contribution room to $95,000.

Read more »

money cash dividends
Investing

Sitting on Cash? These 3 TSX Stocks Are Great Buys

Got some cash left over from the Black Friday sales? Here are three TSX stocks that could have long-term upside!

Read more »

tsx today
Tech Stocks

TSX Today: What to Watch for in Stocks on Tuesday, November 28

Canadian bank earnings and the U.S. consumer confidence data could give further direction to TSX stocks today.

Read more »

money cash dividends
Dividend Stocks

3 Passive-Income Streams That Will Take You to the Next Level

These passive-income streams do not take a second more of your time. Focus on your day job and look forward…

Read more »

A worker uses the cloud for paperless work. tech
Tech Stocks

Alibaba Just Became a Dividend Stock… Could This TSX Stock be Next?

Alibaba Group Holding (NYSE:BABA) recently became a dividend stock. Could Kinaxis Inc (TSX:KXS) be next?

Read more »