The Silver Lining of Bear Markets: Opportunities for Long-Term Canadian Investors

Here’s what I would personally buy if a bear market rears its head.

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As of December 2023, Canadian investors have managed to navigate the year without encountering yet another bear market like 2022’s.

This is evident in the positive performance of major indices as of December 6, 2023: the S&P 500 has seen a price increase of around 19.4% year to date, and the S&P/TSX 60 has risen by 4.8%.

These figures are a clear departure from what is typically defined as a bear market, which is generally characterized by a decline of 20% or more from recent highs in broad market indices.

Now, the fear of a bear market is always looming in the minds of most investors. This apprehension can sometimes lead to irrational behaviours, such as panic selling or excessively hoarding cash, which can be detrimental to long-term investment success.

However, it’s beneficial for investors to shift their mindset and view potential bear markets not just as threats but as opportunities. Personally, I find it helpful to prepare by making a list of exchange-traded funds (ETFs) that I would consider buying at “fire sale” prices if a bear market were to occur.

Buy the entire world’s market

My first pick is a globally diversified option: iShares MSCI World Index ETF (TSX:XWD). Essentially, this ETF wraps three other iShares ETFs to provide exposure to what its name suggests — the world’s stock market for a 0.48% expense ratio.

Right now, XWD is split around 62% in U.S. stocks, 25% in European and Asian stocks, and 3% in Canadian stocks. The relatively 3% in Canadian stocks appeals to me because I prefer not to overweight domestic equities beyond what their market cap weights should be.

Another reason I like XWD is due to its exclusion of emerging market countries like China, India, and Brazil. These countries might have high growth potential but come with great volatility, so I’d rather avoid that risk entirely.

Should a bear market hit, my thesis for buying XWD is simple: I’m betting on the eventual recovery of the world’s stock market, agnostic as to which country does better. Short of nuclear Armageddon, I’m confident that this strategy will work out for the long term.

Buy global quality stocks

The other ETF on my bear market fire sale watch list is BMO MSCI All Country World High Quality Index ETF (TSX:ZGQ). This unique ETF uses a rules-based index to screen out around 500 global stocks it deems to be of high financial quality.

ZGQ identifies these stocks using a methodology that measures three fundamental drivers of quality: high return on equity, stable year-over-year earnings growth, and low financial leverage.

Now, the problem with investing in quality stocks is that everybody knows they’re good, which means you can’t buy them at decent valuations. Essentially, you end up overpaying for quality.

However, during a bear market, these quality stocks get dumped by panicked investors, allowing smarter ones to snap them up at a bargain price, despite little change in their fundamentals.

So, instead of making your own quality stock watch list for a bear market fire sale, consider just keeping an eye on ZGQ to get a diversified basket of them. The ETF charges a 0.50% expense ratio.

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 Tony Dong 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.

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