Successful long-term investing requires self-knowledge and self-discipline. Whether you are just starting out on your investing journey or have been investing for decades, it is critical to have the right “mindset.” Over the long term, the stock market has consistently yielded positive returns. But we know that, from time to time, the stock market will decline significantly. Not could decline significantly; will decline significantly—and frequently! This absolute certainty was made abundantly clear in early 2020, during 2008/2009 and on many other occasions.But no one knows exactly when or by how much stocks will drop. You must accept this reality, treat stock market downturns as perfectly normal, and not react to them. Learning to drown out the noise of the markets will enable you to achieve a far better long-term investing outcome. Here are three steps that will help.

You’re a business owner—so act like one

The most powerful wealth machine ever built, the stock market “democratizes” capitalism by making business ownership available to anyone with even modest means. You can purchase shares in great companies at exactly the same market price as the largest institutional investors

pay. As a shareholder of public companies, do not think of yourself as a “stock market investor.” Think of yourself as a business owner. And business owners don’t waste energy fretting about daily changes in the ‘market value’ of their businesses. They focus on building the value of their businesses through long term earnings growth. Of course, you have boards of directors and managers running your businesses. And regardless of how you spend your day, thousands or millions of your employees will spend their day on their primary mission: creating wealth for you. And you don’t have to lift a finger. Fantastic!

Whether you own stocks directly or through funds, taking this same business owner point of view will help put the largely meaningless short term stock market ups and downs in perspective. 

Find your balance

Determining the portion of your portfolio to invest in stocks versus more safely in bonds or GICs will be your most important investment decision. Invest in stocks only to the extent you are committed—as a business owner—to ride out market storms. As a worst-case scenario, let’s assume that there will be up to a 50% decline in stock values during a future economic crisis, similar to the darkest hours of the 2008–’09 global financial crisis.

Ask yourself this question: What level of short-term losses in my total overall portfolio am I prepared to tolerate during a stock market crash? Your answer may change over time but your “tolerable loss ratio” can provide a useful rule of thumb when it comes to determining the right mix of stocks and bonds in your portfolio at any given point in time.

If your “tolerable loss” is zero—in other words, if you aren’t prepared to suffer any losses whatsoever, even short-term losses—you are in full wealth-protection mode. You should own zero stocks.

What if you are willing to accept the risk of short-term losses up to around 25 percent of your total portfolio in order to have a high probability of long-term gain? In our worst-case scenario of a 50% market crash, the total value of a $100,000 portfolio split 50/50 between stocks and GICs would decline by 25% to $75,000. (The stock portion would decline in value from $50,000 to $25,000 while the GIC value remains constant at $50,000.) Therefore, if your  tolerable loss is 25%, you should place no more than 50% of your investable assets in stocks, with at least 50% placed in GICs or bonds. 

If, however, you are committed to weather the storm of a potential short-term 50% market meltdown in order to capture 100% of the ultimate long-term growth of the stock market, you may choose to be 100% invested in stocks.

Mentally preparing yourself, as a business owner, for regular stock market declines of 10% to 20%, occasional declines of 30% or more, and even extreme scenarios like the 2008–’09 crash, and determining your stock/bond allocation accordingly, is fundamental to the kind of long-term thinking necessary to achieve investing success.

(Keep in mind that when interest rates increase, bonds will decrease in value and the longer the maturity of the bond, the greater the price decline. Therefore, investors who want to limit the impact of rising rates would be well served to stick with GICs, short-term bonds or short-term bond ETFs.)

Invest like clockwork

As you build your portfolio, commit to a regular investment schedule. Whether you choose to place your money in the stock market quarterly, semi-annually, or annually, stick to your schedule regardless of how the market is performing. It’s easier said than done when the market is trending down and all the “noise” is negative, but in the long run it will work for you. When withdrawing cash from the market during retirement, remain indifferent to market moves and use exactly the same “steady as it goes” approach. 

For most of us, investing is a multi-decade journey. Ignoring short term market moves, focusing on the long-term and maintaining the right mindset, including thinking like a business owner, finding the right asset mix and investing like clockwork, will help you achieve the investing success you deserve.

Larry Bates is the author of Beat the Bank: The Canadian Guide to Simply Successful Investing, and an investment advisor with Aligned Capital Partners Inc.


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