We’re all investing in a world of uncertainty. I’d argue that’s what it means to be an investor – take near-term risks to create a better and more prosperous tomorrow.
The thing is, all the risk-taking behaviour that drove markets to all-time highs and continues to drive valuations higher than they’ve ever been may indeed be coming to an end at some point. Trees don’t grow to the sky. And while these returns have benefited a wide swath of Canadians, it’s also true that playing defence before the tide turns is the way to go.
Here are three strategies I think investors can implement wisely to protect their downside in case of a bear market forming in 2026.
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Consider reallocating your portfolio
As we near the end of the year, one of the most powerful periodic things I think investors can do is to assess how their sector and company-specific exposures sit. Knowing just how much one owns in a particular sector or trend can determine how much risk one is holding heading into a new year.
Risk management and capital preservation are two factors I’d argue have been overlooked in recent years. Investors could almost throw darts at a board of growth stocks and still end higher from the 2023 period to today.
But moving forward, I think that dynamic could change. Knowing what one’s exposure is to specific sectors and adjusting one’s portfolio accordingly to other sectors that may have more upside could be a winning bet in 2026.
Add more defensive exposure
On the reallocation front, I think focusing on consumer staples, certain picks in the financials sector, utilities and other companies considered to be acyclical can be smart moves.
I’ve long touted a number of blue-chip Canadian stocks as top picks in this regard. Indeed, there happen to be a number of top Canadian stock picks trading on the TSX worth considering from this standpoint. Specifically, I look for companies with rock-solid balance sheets, pricing power, and solid management teams that can drive results during downturns.
These factors are likely to be considered more important in 2026 and future years. For those who think we may be headed for a downturn, that goes double.
Consider portfolio hedges
For investors who are almost entirely exposed to the equity markets, owning assets that are inversely correlated to stocks can be a solid move. Over the long term, such a truly diversified portfolio may not provide the same amount of upside (stocks tend to outperform other lower-beta asset classes like bonds over the long term). However, in periods of market declines, these assets can gain in value, offsetting losses.
So, again, for those concerned about market downside ahead, this is a key factor to consider. I’m personally looking at adding more fixed income exposure in 2026 via bonds, real estate, and ETFs that track these two alternative asset categories.
