It's a Bear Market. Now What?

It's here. It's back. Not seen since 2011. Yes, the dreaded bear market. A bear market in most cases is defined as a downturn in a broad market index of at least 20%. The TSX Composite Index is now in this camp having traded down over 23% from the highs set in 2014.

Let's take a look at where we are and where we could be headed. The chart below will give you an idea of the severity of this current sell off in comparison to other bear markets over the last 15 years.



Right now as it stands this is a mild bear market in comparison to 2009 and 2002. It may feel worse then it actually is because the majority of Canadian investors have a portfolio that's heavily weighted in oil and gas stocks. That sector is down over 50% and has been in a bear market since late 2014.

It's important to take a look at where we could go from here. How bad could it get? There are some pretty obvious levels below that could now be in play. The lows from 2012 around 11,000 and the trendline (green) around the 10,000 area are the next levels of support. There's no guarantee these levels will be reached (or will hold) but the path of least resistance is down and the 11,000 area is not that far away. If we reach the green trendline in the chart above the TSX would be down around 36% depending on how long it takes to get there.

So what does this mean? What do you do? Sell everything and go to cash? Refinance your house or take out a loan and buy as many stocks as you can? I've traded and invested through multiple bear markets starting in 2000. For the trader they provide many opportunities but for long term investors it can be gut wrenching as bear markets can take quality stocks down with it. In my experience the market always recovers and moves to new highs but that doesn't mean every individual stock or fund will do the same. People tend to forget this and will be frustrated when the market recovers but their portfolio doesn't.

It's in these difficult and volatile markets that a very close inspection of your portfolio is necessary. What stocks will recover with the market? What stocks will lag? Am I overexposed to a specific sector? What type of mutual fund am I in and how will these funds perform when the market turns around? The vast majority of mutual funds and actively managed accounts fail to outperform their benchmarks which are usually the broad market indexes. If you own mutual funds maybe it's time to take a look at low cost index funds as a replacement. You'll save at least 1% on fees and will get the return of the "market" that most funds fail to duplicate.

Now's the time to exam how to preserve capital as the bear market runs its course and how to best position for the coming turnaround. Right now is not the time to bury your head in the sand. There's a big difference between "buy and hold" and "buy and hoping". 

There's no better time to take control of your investments then right now!

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