For many investors, the rumblings of a bear market often evoke a visceral reaction: panic. The instinct to sell off assets and convert them to cash can be overpowering.
However, history has shown that reacting to market downturns with haste can often sideline investors from potential rebounds and long-term growth opportunities.
Rather than succumbing to the pervasive fear, there are smarter strategies to employ. For Canadian investors, understanding and leveraging these methods can be the key to not only riding out the storm of volatility but also capitalizing on the unique opportunities that such markets present.
After all, a bear market doesn’t signify the end; it can be the beginning of a fresh journey, provided one remains patient, informed, and invested for the long term. Here are two of my favourite strategies.
Image source: Getty Images
Dollar-cost averaging
Dollar-cost averaging (DCA) is a straightforward yet powerful investment strategy, especially for those looking to mitigate the effects of market volatility and reduce the emotional element in investment decisions. But how does it work?
Imagine you decide to invest a fixed amount of money into BMO S&P 500 Index ETF (TSX: ZSP) every month, regardless of its current price. Some months, the price of ZSP might be high, so you’ll buy fewer units.
In other months, the price might be low, allowing you to buy more units. Over time, this approach results in purchasing the exchange-traded fund (ETF) at an “average” price rather than trying to time the market and guess when the price is at its lowest or highest.
The beauty of DCA is in its simplicity. By committing to regular, fixed investments, you inherently buy more units when prices are low and fewer when prices are high. This can potentially lower the average cost per unit over time.
However, for DCA to work, your portfolio needs to be diversified. By investing in something like the ZSP, you’re diversifying across a broad swath of companies within the U.S. market. This wide exposure reduces the risk of significant losses that could come from putting all your money into a single stock.
Use low-volatility ETFs
Low-volatility ETFs stand out as another unique tool for investors looking to navigate market ups and downs with a bit more ease. These ETFs select and overweighting stocks that have historically exhibited lower price swings, or what’s known in financial terms as “low beta.”
Here’s a simple way to understand beta: it’s a measure of a stock’s price movements in comparison to the broader market. A beta less than one indicates that the stock is less volatile than the market, while a beta greater than one indicates it’s more volatile.
A great example is BMO Low Volatility Canadian Equity ETF (TSX: ZLB), which has a preference for stocks from defensive sectors, like consumer staples and utilities that represent essential, everyday goods and services.
By concentrating on these low-beta, defensive stocks, low-volatility ETFs aim to offer investors a somewhat steadier and less-erratic investment experience. It’s like choosing a calm river over a choppy sea for a boat ride.
However, an essential point to remember is that no investment is entirely immune to market shocks. In the face of a significant market downturn or crash, even low-volatility ETFs can see declines.
The difference is in the degree and frequency of these declines. While these ETFs can indeed face downturns during particularly turbulent times, their overall journey tends to be less roller-coaster-like compared to their higher-volatility counterparts.
