Stock market declines are nerve-racking. No investor enjoys seeing their portfolio decline. The old adage, however, is to buy low and sell high. A silver lining to a bear market is that it creates an opportunity to buy low. Math also supports this idea. It shows there are accelerated returns for those that invest during the market lows. Consider this example: if the stock market drops 35%, there must be a significant bounce off the bottom to fully recover. From the low point, the market must gain about 54% to fully recover. That is a significant gain and often the reason people try to invest during a downturn in the market.
However, that view is a little bit simplistic. No one knows where the exact bottom of the market will be, recoveries are often not immediate. They take time and bear markets can stir up a lot of emotions. Investing during turbulent times isn’t easy. Below, we review a few strategies for how to add money to your portfolio during a bear market. Lump Sum: The simplest method is to just dump your money in. You are not trying to pick the bottom, no second-guessing, when the money is available, it gets invested. While this method is the simplest, the downside is that it has the greatest chance of regret. If you invest a lump sum then the market drops further, in the long term, you’ll likely do just fine. But in the short term, you probably won’t feel so great. Strategic: Pick an entry point in advance. If stocks drop 20%, I am putting more money in, for example. You set a threshold and then invest when the market hits that mark. The negative of this strategy is that the market may not play along. We might set the threshold at 20%, but stocks may only drop 17% and never hit our threshold. If you follow this investment model, it’s a good idea to have a plan B. Average In: Once you’ve decided to invest, break the money up into chunks and then invest those pieces on a pre-determined schedule. Perhaps you want to invest $40,000 during the market lows, then break it up into $10,000 chunks and invest one every two weeks. How many chunks and the time period between each investment can vary, the idea is to create a schedule and stick to it. Mix and Match: All the above options have good features and drawbacks. It makes sense to combine them. Perhaps some of the money will be invested as a lump sum, a portion if the market hits a certain threshold and the rest will be put in on a pre-determined schedule. Investing during a bear market can be touchy and there is a lot of emotion involved. While in the long term the money you added might be profitable, in the short term it can be stressful. No one knows where the exact bottom will be and bear markets are turbulent, there is a good chance you will put money in, and, in the short term, the markets will move lower, which can make investing during turbulent times nerve-racking. The above strategies encourage you to form a plan and try and take some of the emotion out of it. You don’t have to put extra money into your portfolio during a downturn. To fully benefit from the investment, you must be able to tolerate a certain amount of risk and have a long-term time horizon. This isn’t for anyone. Like any investment, you want to chat with your advisor prior to investing to ensure it is right for you. About Clinton Orr: Clinton Orr is a portfolio manager from Winnipeg, Manitoba. Throughout his nearly 20 years of experience in the wealth management space, he has valued creating strong relationships with his clients through an empathetic and dedicated approach that is focused on their financial goals. He regularly writes columns for his local paper, The Clipper Weekly, which covers news across the Lac du Bonnet and Winnipeg River region. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning https://advisorweb.cgf.com/content/uploads/sites/67/investing-during-bear-market.pdf |
AuthorClinton Orr is a Senior Wealth Advisor and Senior Portfolio Manager with Canaccord Genuity Corp. Archives
July 2023
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