Finance What to do about this bear market: getting your game plan together OK, now that we have some perspective regarding what exactly bear markets are, what causes them and how long they typically last, let’s get to the real question: what to do if you find yourself in the middle of one. Here are some ideas: 1. Recognize that things have changed First things first: get into the mental mindset of a bear market, and understand that things have changed. In practical terms, this means that you should be prepared to accept that the strategies and ideas which worked well in the recent past probably won’t work quite as well in the new investment environment. For example, some markets that have been on a tear recently may now be in for an extended period of mediocre performance. Popular investment themes that have captured headlines (examples: electric cars; renewable energy; cryptocurrencies; pot stocks; etc.) may need to be reassessed. And stocks that have been the “darlings” of the market − think Facebook, Amazon, Netflix, Google and similar companies − may not be so well-loved going forward. This is not to say that you’ll need to liquidate your portfolio. And it’s also not to say that these formerly hot ideas will never be hot again − maybe they will some day in the future. Rather, it’s a reminder to temper your expectations and not to assume that things will quickly return to the way they used to be. 2. Prepare for higher interest rates Fact: the current bear market is being driven in large part by the rapid rise in interest rates. Since the start of the year, the U.S. Federal Reserve has increased their trend-setting overnight lending rate from 0.25% to 1.75%, and has signalled that more increases are in store for the rest of the year. The Bank of Canada has said that it plans to largely follow the Fed’s lead. Rising rates require investors to understand that entire classes of businesses which excelled during times of low rates are likely to struggle as rates rise, while others will benefit, and still others probably won’t be affected much at all. Learning to understand how these different businesses work in the new environment will be an essential part of successful investing during this bear market. The same basic truth applies to your personal circumstances. For example, if you’re a retiree whose portfolio is largely geared to bonds, GICs and other fixed-income investments − good news!Those investments will probably start paying you a lot more in interest than they have in recent years. On the other hand, if you hold a variable rate mortgage, or if your retirement portfolio is full of growth stocks, interest rates might turn out to be a real headwind for your finances. And if you’re a retiree with a balanced portfolio, who’s paid off your mortgage and has a rental property or a pension that rises a bit each year with inflation (as many former government employees do), higher interest rates might not mean much at all. 3. Review baseline expenses Live within your means − solid financial advice at any time. But when the economy enters a period of uncertainty and stock market volatility seems to increase on a daily basis, it’s especially important wisdom to keep in mind. To get a complete picture of your spending, you could do a full budget analysis and track every nickel in and out of your chequing account for a fewmonths. But most of us have better things to do. Instead, take a close look at your “baseline” expenses: what you spend on housing, transportation, food and health care. These broad categories cover most of the non-discretionary spending for most snowbirds most of the time, before we think about going on a trip, dining out, buying a new gold watch, and so on. Each broad category contains a number of expenses within it (for example, housing might include rent or mortgage payments, along with property taxes, insurance, utilities, and so on). Taken together, they’ll give you a good picture of how much cash you’ll need on a go-forward basis just for living, along with a few ideas about where you might be able to tighten your belt a bit. 4. Re-evaluate your withdrawal rate Howmuch should you withdraw from your retirement savings every year? Even in good times, it’s always been a tough question to answer. But it becomes even harder during a bear market, when stock market volatility means selling beaten-down investments to generate cash. In the past, most professionals would rely on simple rules of thumb when determining an effective retirement withdrawal rate. You may have heard about the 4% rule − the assumption that retirees can reasonably withdraw up to 4% of their retirement capital in any given year without too much worry about ever running out of money (assuming an average life expectancy, reasonable spending habits, investment in a reasonably conservative portfolio that included at least some dividend-paying equities, and so on). Given the current market environment, it’s best to consider the 4% rule as a starting point for a more detailed exploration, rather than a “set in stone” number that works for all people in all circumstances. If your portfolio generates significant income, then perhaps 4% is a good target to aim for. On the other hand, if you’re accustomed to trimming the winning positions in your portfolio in order to generate income, maybe 4% is too much − at least until the stock market sorts itself out. CSANews | SUMMER 2022 | 39
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