Like it or not, bear markets come along once in a while, usually throwing us into a state of discomfort and worry. Yet, after having been through it more than once, we come to understand that panic decisions make everything worse. Essentially, we want to avoid making paper losses into realized losses.
Bear markets resolve in time
Let’s take the bear market that began in September 2000 and lasted until July 2002. During this time, the stress that was felt as the S&P/TSX Composite Index fell 46% was real. If someone panicked at the height of the decline, they might have sold the index when it was trading below $6,000. If, on the other hand, they stayed the course, they would have gone on to enjoy the TSX’s ride up to today’s level of over $20,000.
A diversified portfolio helps
Of course, our level of comfort in a bear market likely depends on the quality of our portfolio. If we own a well-diversified portfolio of stocks that are leaders in their industry, we can have more confidence. This means companies with strong balance sheets and well-established businesses, ones that allow us to feel more comfort riding out the decline. If, by contrast, we own financially shaky stocks that have an elevated risk profile, we would naturally be more prone to panic, increasing the likelihood of selling at the lows and realizing big losses.
Stocks to ride through any environment
Canadian banks are famous for their resilience and financial strength. That’s not to say that they don’t go through times of crisis. But, it does mean that we can likely bet on them coming out at the other end of the crisis. Capital preservation has been a key benefit to owning Canadian bank stocks throughout history.
Let’s look at Toronto-Dominion Bank (TSX:TD), one of Canada’s leading banks. TD has been through bear markets in the past, along with the rest. But today, it’s stronger than ever and those of us who hung onto the stock in bear markets are very happy for it. TD Bank’s stock price graph below illustrates this. The benefit of hanging tight and staying the course has been evident over the long-term.
Controlling our emotions
We are emotional beings. There’s no escaping that, nor would we want to. The key is that we must learn to handle our difficult emotions while feeling the benefit of our emotional existence. The way to do this is to study history. Also, set yourself up with strong stocks that are resilient over time. TD Bank stock is an example of this type of stock, but there are many other stocks like this. Look for competitive advantages, strong balance sheets, and an essential product and/or service that’s in high demand.
Setting ourselves up with stocks like these will enable our portfolios to come out at the other end of a bear market unscathed – as long as we refrain from panic selling!
The bottom line
Going through the stress of bear markets is inevitable in investing. Use it to your advantage – don’t sell and realize what would otherwise be temporary paper losses. Instead, consider buying quality companies during these times to get yourself a great deal on some great companies.
