Experienced hikers can teach investors a lot

One thing that experienced hikers always do when they are preparing to go into the bush is plan for bears. They know what to do if confronted by a bear and are aware it could happen at any time. They prepare a plan and stick to it. They don’t postpone their hike, instead they make sure to be prepared before their hike.

This is exactly what investors should do in relation to bear markets. What is a bear market? It is a market decline of 20% or more. Since World War II there have been 13 bear markets. The average decline is 30% and the average period of decline is 17 months.

How do you prepare for bear markets? Make sure your investment plan assumes that bear markets will occur. Like a bear sighting, bear markets happen, so let’s be prepared for it. Let’s understand how they operate so we can handle it. If you are an investor whose plan is to accumulate investments prior to retirement, you should jump for joy if a bear market appears before your retirement. If a bear market does occur you may be able to acquire long term assets at lower prices than you previously paid for them. The key in this case is to stick to your plan, and keep buying all the way through the bear market. This can be a huge opportunity that should be embraced.

If you are already retired, make sure that your investment plan has enough assets set aside to be able to live on through a bear market without selling equity positions while the bear market exists. I like clients to have two to three years of income set aside in ultra-conservative investment vehicles with lots of liquidity. This is known as our Financial Bomb Shelter. Our Financial Bomb Shelter allows the investor to keep getting income through a long bear market and avoid selling anything at a loss. As an added bonus you can continue to receive dividends from equities that keep coming on an ongoing basis.

So, like experienced hikers, be prepared. No need to postpone a wonderful hike -- just always be prepared for the next bear market.

If you would like to get a second opinion on your financial plan please contact me at 613.696.3941