What to do in a bear market: relax.

A bear market is when the market is 20% or more off its high for the past year.

Ritholtz Wealth Management’s director of research Michael Batnick discussed why “bear markets suck” but I took something different away from his piece: bear markets are not as frequent nor as common as most people believe.

“Going all the way back to 1897, the Dow was in a 20% draw down 33% of the time. But a lot of this is skewed by The Great Depression. . . . If we start from 1950, that number collapses to 16.5%.

But a 20% decline should hardly be enough to strike fear into a long-term investor. When you’re down 20% you start to get nervous, at 30% you start to lose sleep, at 40% you hit eject … So why all the fuss? Because a bear market can wipe out years worth of gains. YEARS!

At the bottom in 1932, the Dow was back where it was in 1903. At the bottom in 1974, the Dow was back where it was in 1959; at the bottom in 1980, the Dow was back where it was in 1964; at the bottom in 2009, the Dow was back where it was in 1997.

I understand why people spend so much time preparing for an unlikely outcome, but worrying too much about the downside prevents you from participating in the upside. The most important thing is to build a portfolio that can capture the upside while allowing you to sleep at night during the inevitable downside. There is not a universal portfolio. Everyone’s gotta find what works for them.”

Batnick nails it. My grandfather, who was born around 1875, was an investor during the Great Depression and the Second World War. He did not sell. He bought the bargains. His Canadian bank stocks kept paying dividends and he exited the bear market in better shape, in many ways, than the way he went in. His advice? Buy quality and hold. I am trying to take dear old gramp's advice to heart.

So, you have a self-directed account. What next?

A friend just opened her first self-directed investment account. Now, she is wondering, "Now what?" When I learned that at this moment she has only a small amount to invest, not even $2000, advice was easy: round up some more cash. Right now, she cannot afford the cost of trading fees. The answer: mutual funds, if available, free of trading charges.

I checked and her account does allow the buying and selling of mutual funds with no commission (She should double check.), although there is fee for selling a mutual fund when held for less than 30 days. With TD WebBroker there are two series of mutual funds that may interest her: the D-Series and e-Series mutual funds. The D-Series trims a little from the MER and the e-Series attempts to compete with ETFs.

I know today mutual funds are out of favour with many. ETFs are the investment vehicles of choice. It may surprise you to know that sometimes mutual funds can best ETFs. I've run demo portfolios created using low MER mutual funds and done amazingly well.

TD claims the key reasons to own D-Series and e-Series Funds are:

• Access to professional fund management
• Lower management fees
• No commissions to buy or sell

Here is a partial list of some of the TD mutual funds that may be of interest to an investor with a TD WebBroker self-directed account.

TD Canadian Blue Chip Dividend D TDB3105

TD Dividend Growth - D TDB3088

TD Ultra Short-Term Bond - D TDB3078

TD Monthly Income - D TDB3085 

TD U.S. Blue Chip Equity D TDB3091 

TD US Index e TDB902 

TD International Idx Currency Neutral-e TDB905

TD Ultra Short-Term Bond - D TDB3078 

If I were forced, for whatever reason, to invest in mutual funds, my person choice would be to mix two funds: TDB3085 (for exposure to Canadian equities and bonds) and TDB3091 (for U.S. equities exposure).

I have a demo portfolio running the above mix. It has performed very well. I might change the U.S. mutual fund component to TDB902. I believe it delivers similar performance but a better dividend. I like putting more TDB3085 into the mix than U.S. equities but there are arguments for weighting the mix towards the States. It is the investor's call. 

If you are not fond of bonds, I'm not, I'd consider switching TDB3085 for the pure Canadian equity play TDB3105. This is not an easy decision. At times the Monthly Income fund bests the Canadian dividend funds and it usually pays a better dividend. Again, it's the individual investor's call.

 

The above approach gets one into the market but unfortunately locks one into the market for a month if one is to avoid all charges. When one has more funds available, the next move is to invest in a portfolio in an ETF like XEQT. 

XEQT is a pure equity play that gives an investor exposure to global markets with the accent on the States. If one prefers a portfolio with a bonds component, the XGRO is the way to go.

Whether one moves on to building a personal portfolio of individual stocks is an open question. Using TD WebBroker Portfolio Manager, I'd build a demo portfolio mirroring my wish list portfolio. Then I would note how my dream portfolio performed in comparison to the portfolios-in-an-ETF such as XEQT, XGRO, VEQT and others if they are of interest to you.

XEQT is the green line; TSX is the purple line.

Later today, January 9, 2022,  I'm going to create five $30,000 portfolio. One will be a mix of two mutual funds: a Canadian Blue Chip Dividend fund and a U.S. Index fund. The second and third demo portfolios will simply be either the TD Monthly Income fund or the BMO ZMI Monthly Income fund. The fourth and fifth portfolios will both be ETFs marketed as complete portfolios in an ETF. (XEQT is the pure equity play and XGRO is the a more traditional approach with 20% in bonds).

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Note: Mutual Funds Update after markets close -- Updated as of 6:30 PM, Feb. 4, 2022.

30% TDB3105 (TD Canadian Blue Chip Dividend D) . . . . . . . . . . . . . . . . . . . . . . $29,431.54 CAD

70% TDB902   (TD US Index e)28,585.98

 

TDB3085 (TD Monthly Income - D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,289.75 CAD

ZMI (BMO Monthly Income ETF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $29,676.70 CAD

 

XEQT (iShares Core Equity ETF Portfolio) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $29,375.69 CAD

 

XGRO (iShares Core Growth ETF Portfolio) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $29,400.96 CAD

 

After about a month, the TD Monthly Income mutual fund is leading the pack.