Never Retire Profile of the Week
Sir Ian McKellen & Sir Patrick Stewart
Sure, Gandalf and Captain John-Luc Picard are two entirely different fellows. But great friends and frequent colleagues, McKellen and Stewart perfectly represent the Never Retire philosophy. Born a year apart – McKellen in 1939 and Stewart in 1940 – they both began in theatre, have prolific careers, have been knighted, and achieved tremendous success in their later years. They became close while filming the X-Men movies, playing Magneto and Professor Xavier, and now consider themselves best friends – McKellen even officiated at Stewart’s wedding in 2013. They have shared the stage in productions like Beckett’s Waiting for Godot and Pinter’s No Man’s Land. They are also activists committed to charitable work in several areas, such as domestic violence, combat stress, LBGT rights, and elderly care. Please carry on working and giving, good sirs. Or as Picard would say, make it so!
In a bear market, who doesn’t start imagining wondrous and fantastical – perhaps even magical – solutions when the value of their investments dramatically falls? I do at times, though I never act on them. I hope you also refuse to grasp at glittery straws. It’s not easy to remain level-headed at times like these, but we would all do well to keep fairy tale solutions firmly in the imagination where they belong. Don’t take them out into the real world.
To help you stay the course and come out the other side of a downturn intact or, perhaps, even better off than before, here are four ways to take advantage of a bear market and four ways to avoid trouble.
Four Opportunities of a Bear Market
1. Buy the stuff you need to improve your business/home
If you are fortunate to have steady revenue/income and plenty of cash on hand, it could be a great time to buy what you need for your home and your business. There are likely not a lot of customers shopping today, so buying today has two advantages. First, you help the business owner stay in business by purchasing their products. Second, as demand has declined, you may obtain an attractive price for the product.
2. Buy stocks instead of luxury goods
This advice will be difficult to implement, but buying stocks during a bear market has historically been a wise long-term decision. Postpone discretionary expenditures and invest the savings into your investment portfolio. Your future self will thank you for this decision.
3. Get rid of painful legacy positions
During the bull market between 2009 and 2020, many investors may have ventured away from investing in solid companies and turned to speculative stocks, such cannabis or start-up companies. Use this opportunity to sell stocks that don’t fit your Investment Policy Statement (IPS), trigger the capital losses, and clear your mind of this issue.
Also, promise yourself that from today onward, you will follow your IPS and not alter your plan when you hear about the next “can’t lose opportunity.” (Note: if your situation changes, you will need to update your IPS.)
4. Consider an estate freeze for your business
An estate freeze crystallizes the value of your business for tax purposes at its current market value (most likely at a depressed value given the recession) and transfers the tax on any future growth of your business to your successors, usually your children. Hence, the estate freeze allows the business owner to calculate the tax liability due on their death and permits any future tax to be paid by the next generation.
Four Mistakes in a Bear Market
I have advised clients through three bear markets (1999, 2001, and 2009) and in each; I am tempted to do a bunch of things that in hindsight will prove to be counterproductive. But as mentioned already, I avoid roads that often lead to trouble. Here are four of them.
1. Timing the market
I don’t know anyone who can successfully and consistently call the top or bottom of any market. But every time the markets falls, many investors feel that they have a special/magical talent to identify the top of the market and sell their investments. And they believe they can also recognize the bottom of the market and buy back at the right time. In reality, this scenario rarely, if ever, happens. Usually, investors sell at the bottom of a cycle and buy at the top of the market, because this approach “feels better” than following a disciplined investment plan.
2. Day trading
Same advice: don’t do this. I don’t know anyone who does this successfully on a consistent basis. You have an Investment Policy Statement. Stick to it!
3. Buying leveraged Inverse ETFs (for that matter, any leveraged ETF)
Some ETFs bet against the market and make the bet more aggressive by borrowing money for their trades. This makes the trade very risky, because the markets historically advance more often than they decline. So you need a particularly good crystal ball to play this game. In addition, the leverage magnifies your losses when the trade goes the wrong way (when the market advances instead of declining).
4. Leaving the stock market for alternatives
Anytime the stock market declines, you always hear some people say “I told you so.” No matter what they were selling before the market drop, they will point out that the stock market just fell 20-40% and that you should have bought whatever they are selling. Maybe they’re selling a digital currency or a start-up company with “unbelievable potential.” Whatever the case, they will show you charts and facts to prove their investment ideas are better than stocks.
For me, their cries are annoying and should be ignored.
If you were convinced of the long-term merits of owning stocks in the world’s most profitable companies before the bear market, then I see no reason to change course and try an alternative investment.
I hope these do’s and don’ts help you stay safe in a bear market and come out stronger when the pandemic is under control and the economy improves. Bottom line: put away the magic wands and ouija boards, trust the historical data around bear and bull markets, and have faith in the kind of dependable strategies used at the Dri Financial Group.
Did this article resonate with you? What did I miss? Send me a note and let’s start the conversation.
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source https://richarddri.ca/4-ways-to-take-advantage-of-bear-market-opportunities-and-4-missteps-to-avoid/
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