How to invest in a bear market

July 29 2008 by Ellen Roseman

In today’s Globe and Mail, you can find several experts giving advice to investors about what to do when stock prices fall.

George Vasic, strategist at UBS Securities Canada, recommends a portfolio of 12 large-cap Canadian stocks that is heavily weighted in dividend-paying issues and has substantially outperformed the S&P/TSX 60 index since its inception in 2004.

But then you read John Heinzl’s column about Dr. Doom, a U.S. analyst so pessimistic about the U.S. economy that he lives in a rented house and keeps the vast majority of his and his clients’ money outside the country, a healthy chunk of it in gold and energy stocks.

To say Peter Schiff is bearish is like saying Tiger Woods is an okay golfer, or China has a small problem with air quality.

Apart from gold and energy producers, which benefit from a plunging U.S. dollar, Schiff likes conservative, dividend-paying stocks such as pipelines and utilities. He’s especially fond of Europe, Asia, Australia and Canada, where his holdings include Barrick Gold Corp., Goldcorp Inc., Crescent Point Energy Trust, Baytex Energy Trust and Pembina Pipeline Income Fund.

You might want to sell everything you own and start over. But then you remember the calming words from Tom Bradley, former head of Phillips Hager & North mutual funds and now running his own shop, Steadyhand Investment Funds Inc.

It is not the time to bail out on your long-term plan. There may be more pain and suffering in the near term, but it will be nothing like the devastation clients experience when they make a radical shift at the wrong time (i.e. loading up on technology stocks in the late 1990s or moving into cash in 2003). When markets are extreme and volatile, it is a bad time to change direction. Your plan was put in place for just this circumstance.

So, what are you doing with your investments? Rejigging or staying put? Any tips for others as we head into what could be a long bear market?

13 comments

  1. Grampa Ken

    Jul 30 2008

    Short term bonds and credit union GICs (approx 1% higher rates than banks).

  2. brad

    Jul 30 2008

    I’m keeping everything right where it is. My RRSPs are 100% invested in index funds, plus I have a more diversified portfolio in a couple of retirement accounts (401k) in the U.S. from the years I worked there (I’m a dual citizen).

    Moving forward, I will probably diversify any new money I put into my RRSPs so it’s not totally in stocks. But I’m still about 15 years away from retirement, so I feel it’s way too early to think about moving money I’ve already invested.

    The value of my RRSP portfolio could drop right to zero and I wouldn’t bat an eye at this point.

  3. Susan

    Jul 30 2008

    Holding stocks with dividends that grow, a bit in energy, infrastructure and health. Will continue to hold and let my dividends carry me through.

  4. Potato

    Jul 31 2008

    I’ve just finished moving into equities. I used to keep a healthy year’s worth of food and rent costs in a high-interest savings account (what I call both my emergency fund and fixed income portion, though it’s not quite the same as a bond fund), but now stocks look cheap and interest rates have dropped to the point where I don’t think I’m even keeping up with inflation.

    So, boom, it all goes into the stock market, and I opened up a line of credit so I have liquidity if something happens and I do need that emergency fund.

  5. Charles in Vancouver

    Jul 31 2008

    Nobody really seems to agree on what the “real” outlook is… so I’m keeping my money in the same passive index funds as I would have chosen in a good market. Rebalance annually and keep my eye on it. Diversify to additional funds when I have the money for it.

  6. Grampa Ken

    Jul 31 2008

    I’ve been bearish for awhile and as a senior, I do not take a very long range outlook. Mine is mainly technical oriented. At the Big Picture blog, a DJ chart expresses how every Bull Market has been followed by a significant refractory period.

    http://bigpicture.typepad.com/comments/2005/12/100_year_bull_b.html

    Value line shows a long range chart in more detail from 1920.
    http://www.valueline.com/pdf/valueline_2003.pdf

    Of course, there are many other considerations.

  7. Truth or Talk

    Aug 20 2008

    One thing you generally do not want to own into a bear market is banks. Valuations are not that cheap and provisions are still low.

    While low provisions are generally perceived as a good thing, the reality is that provisions could go up dramatically as the Canadian economy worsens. For the industry as a whole, if provisions were to return to 1991 recession levels, the industry would lose $10 billion in profits.

  8. Josh Kinn

    Sep 18 2008

    In the recent days with the extreme rally of the markets, stay clear of gold companies.

    Yamana Resources, after a near 100 point increase in gold bullion prices, is trading at about 80 to 100 points below Kinross Corp!! There seems to be little rhyme or reason to gold company trading on the TSE these days.

  9. Amber Crawley

    Sep 18 2008

    Can anyone explain why gold companies are between $5 to $10 below their trading prices during the last time gold was near $950 an ounce?

    Today, gold hit near $920 and the gold companies that had peaked back when gold was in the $950 range are several dollars, at least, off their peak share price.

  10. Ash Trennor

    Sep 19 2008

    I’ve also noticed odd trading with gold companies. Yamana Gold was trading at -2% to its last day’s close. while Kinross Gold and Barrick Gold were at +1.6 and +1% to their previous day’s close.

    Considering that Yamana is almost half the trade value of Kinross and almost a quarter of that of Barrick, why does it have such a wide variance? Isn’t it the higher trading shares that usually show the bigger swings (all things proportional to their trading value). Is there some investor news to be known about Yamana Gold?

  11. Grace Kelly

    Sep 19 2008

    I have noticed the same odd trading with Yamana Gold in past weeks. It always lags Kinross and Barrick with much higher trade volumes. It’s almost as if more of it is being bought to control its trade value.

    Who is buying all the Yamana Gold shares these days?

  12. Ellen Roseman

    Sep 22 2008

    Check out what the experts are saying about Yamana here, http://stockchase.com/Company-sl–slq-ID-slv-Yamana–Gold–Inc..php

    I saw Jim Cramer’s TV show last week. He was always promoting Yamana Gold, but he’s not recommending it any more. He’s now boosting Goldcorp and Agnico-Eagle.

    See his bearish call here, http://seekingalpha.com/article/93796-not-off-the-rimm-cramer-s-lightning-round-9-3-08?source=wl_sidebar_search.

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