The stock market goes up and down often with no warning. The Canadian stock market is about 7.5% below its 2022 high, which is not too bad. Still, it’s no fun to hold positions under the water. However, in order to make higher returns in the long run, investors must learn to bear volatility and especially be able to hold through bear markets. Today, I would like to share some tips to help investors in a falling market.
Own dividend stocks
If you own dividend stocks that pay decent and safe dividend yields, then you can get a positive return in any market. Owning dividend stocks doesn’t mean that your positions won’t turn red, but at least you’ll get paid dividend income while you wait. In fact, some investors target to buy and hold their dividend stocks for long-term wealth creation.
For example, buy-and-hold investors of Fortis (TSX:FTS) stock have witnessed their FTS dividend income grow about 82% over the last 10 years. The stock also appreciated about 76%, but shareholders had to bear the ups and downs in between.
The price appreciation was primarily from growing earnings (the adjusted earnings per share were up about 64% in the period), and a bit came from valuation expansion. At $53.52 per share, the blue-chip stock trades at a discount of about 10% and offers a safe dividend yield of 4.2%.
Hold resilient stocks
Fortis is a fairly resilient stock that tends to fall less than (and also may not rise as much as) its peers. It’s also less volatile than the market. This kind of resilient stock can help stabilize the performance of a diversified stock portfolio.
Royal Bank of Canada is also a dividend stock that’s resilient versus its peers. Of the Big Six Canadian banks, so far, RBC and Toronto-Dominion Bank have reported their fiscal third-quarter results. Sure enough, RBC has been more defensive, with the stock popping about 2%, whereas TD Bank stock fell about 3%.
In the long run, TD stock is more likely to deliver a higher return, because it is more discounted. That said, if you want your portfolio to fall less in a falling market, you should consider buying RBC stock on dips over TD stock.
Cash is king
When interest rates were low, investors did not like holding it because it earned very little interest income. It’s a different story today, particularly as investors saw their bond and stock investments falling in a rising interest rate environment. Now, cash is king. Even when interest rates are low, it’s still recommended to hold a sufficient amount of cash.
In fact, you should always hold enough cash for your short-term needs, so you won’t be forced to sell long-term investments at the wrong time. For example, you might put this cash in money market funds, high-interest savings accounts, or laddered Guaranteed Investment Certificates.
Additionally, the general rule of thumb is to have an emergency fund worth three to six months of your living expenses. Since we’re in a higher interest rate environment, you might be advised to lower your emergency fund somewhat to pay down debt so as to lower your interest expenses.
Here’s a bonus tip. Diversifying your assets should also help lower your losses in a falling market. The idea is to target assets that have little correlation so as to lower your investment risk. Your assets may include cash, stocks, bonds, real estate, precious metals, etc.
