The stock market has been a great place to be invested in over the last decade. After all, investments made 10 years ago even in large blue chip companies would have provided some of the returns below:
- ResMed Inc (ASX: RMD) – 480%
- CSL Limited (ASX: CSL) – 430%
- Cochlear Limited (ASX: COH) – 262%
- Macquarie Group Ltd (ASX: MQG) – 178%
And that's before dividends!
Even though the stock market outperforms most asset classes over the long term, volatility and bear markets are also part and parcel of investing in shares. A bear market is defined as a market in which share prices drop by 20% or more from their most recent peak.
Emerging markets for example are already in a bear market currently. Some of the largest companies in China have experienced significant drops from their 2018 peaks including Tencent (down 35%) and Baidu (the "Google of China") (down 24%).
So are you prepared for the inevitable market down turn that will hit the ASX at some point?
Here's what I am doing to prepare myself:
Playing the long game
All new investments that I am making at this point are in companies that I have long term confidence in. It is also being done with funds that I will likely not need in the short to medium term. That way, when the next crisis comes along, I can ride out the storm.
The average bear market lasts for about 18 months with further time needed to return to peak levels and so it's important to have a long term mindset.
Keeping some cash aside
I'm keeping a little bit of cash aside in order to take advantage of any significant market drops in good companies. To be clear, this might not (mathematically at least) be the most optimal strategy because no one can accurately and consistently time the market.
However, it does provide a psychological boost to know that you have some fire power to take advantage when the market loses 30% – 50% of its value.
Searching for good quality companies
Companies with qualities such as low debt, lots of cash, good management and pricing power over their products or services stand a good chance of doing better than average in times of distress and it's almost never a bad time to buy such companies.
