This article was first published in the Globe and Mail on October 5, 2024. It is being republished with permission.

by Tom Bradley

The stock market is doing what it does so well: climb a wall of worry. Investors have shrugged off higher interest rates, recession worries, tensions with China and commercial real estate problems. If your portfolio isn’t at a new high, it’s close.

In my last column, I talked about how tough it is to be a long-term investor, to build and maintain a portfolio through all kinds of weather. Today, the sun is shining and it’s hard to see this challenge, but perversely, it’s the best time to prepare for the not-so-good periods. You can make decisions from a position of strength, and your emotions are less likely to get in the way.

What you’re preparing for is doing the same things you always do, just in more hostile circumstances. Continue making regular contributions. Stick to the mix of cash, bonds and stocks that best fits your time frame and goals. In other words, prepare to be your average self.

It’s an important point. Doing the right thing in difficult times doesn’t require you to be brilliant, perceptive and fearless. You don’t have to be Warren Buffett and load up on stocks that are down. No, you need to do a few small things you’ve done many times before.

Even without the requirement of greatness, however, staying on course is no picnic. One of the most important things you can do to prepare is have realistic expectations of what it will be like. As a starting point, I’ve compiled a list of what you’ll be experiencing when the bear market hits (that is, when stocks are down 20 per cent).

The news will be gloomier. Earnings and economic reports won’t be mixed like they are now. They’ll all be bad. You’ll have to search for the positives because they’ll be obscured by the negatives.

Market analysis will be plentiful, but the quality will be poor. Bear markets are not a time to be definitive about anything, and yet commentators will feel the need to make predictions. The airwaves will be full of comparisons to previous cycles (all of them useless), and strategists will try to call the bottom by applying a market multiple to depressed earnings forecasts (usually overly bearish).

Valuation will be confusing. Valuation is my north star, but it too will give mixed signals. Resilient companies able to maintain their profits will see price-to-earnings multiples drop below the historical range and appear to be great buys. The best opportunities, however, may be cyclical companies that have seen their profits disappear and are trading at stratospheric multiples.

People will be swearing off stocks forever. Just as it’s hard now to see what’s going to get in the way of further gains, a recovery to new highs is equally hard to picture. Investor sentiment will be at the far end of the fear-versus-greed spectrum.

Investors will be confident in their negativity. The late Peter Bernstein said, “In calmer moments, investors recognize their inability to know what the future holds. In moments of extreme panic or enthusiasm, however, they become remarkably bold in their predictions.”

With this confidence, people around you will be taking big bets. I don’t mean buying risky stocks but rather selling and going to cash, which is the biggest risk a long-term investor can take.

You’ll be frozen. When you add it all up – the poor information, negativity and confusing indicators – it will be hard to act. The thought of buying something and losing more money will be crippling.

To be clear, doing nothing is not a bad result, and will be better than most other investors will be doing, but doing what you always do would be even better.

Bob Hager, my former partner and co-founder of Phillips, Hager & North, kept it simple. He made sure he was going back up with as much (or more) than he went down with. In other words, don’t absorb a market decline with 80 per cent of your portfolio in stocks and ride the recovery with 60 per cent.

To follow his advice, you’ll need to do some rebalancing by taking money out of things that have done well and putting it into the hardest-hit areas. You don’t have to do it all at once. There are times when boldness is rewarded, but in this case, baby steps are more realistic. To be sure, some purchases will occur before the market bottoms out, and some will be after, but success in bear markets is not about precision, it’s about getting it done.

So enjoy the sunshine, but don’t miss the opportunity to prepare for rain.