Written by Andrew Button at The Motley Fool Canada
We may be in the early innings of a bear market. Since peaking at 14,385 in July, the NASDAQ-100 index has fallen 12% to 12,643. So far, it’s only a correction, not a bear market, but another few weeks or even days of volatility could easily take us into a confirmed bear. As for the TSX Index, it’s already in the midst of a steep correction, having fallen 14.85% from its high in March of 2022.
The question for investors is, “How do we invest to prepare for a possible bear market?” If you’re a long-time Motley Fool reader, you probably know that we don’t recommend day trading or even timing the markets on a weekly or monthly basis. In general, it’s best to stay the course with stocks. That doesn’t mean you can’t make some prudent changes to your portfolio, though. It’s always wise to include some low-risk assets in your portfolio, so you can make it through volatile periods should they occur.
In this article, I will explore some low-risk investments you can make if you’re worried about a new bear market in stocks.
Guaranteed Investment Certificates
Guaranteed Investment Certificates (GICs for short) are bond-like instruments that are sold by banks. The way they work is, you invest a certain amount of money upfront and get paid back that amount plus a little extra at maturity. In the past, GICs paid almost nothing. With yields as low as 0.5%, they couldn’t even match the consumer price index (CPI). Today, however, you can get GICs yielding as much as 5.5%. If you invest $100,000 into such a GIC, you get $105,500 at maturity. That’s a decent gain — quite possibly, ahead of the inflation rate!
Canada’s CPI increase was 3.8% at the last reading. If it stays at that level or lower for another 12 months, then those buying GICs today will earn what’s called a “positive real return” — a return that is positive after subtracting inflation. GICs up to $100,000 are insured by the Canada Deposit Insurance Corporation (CDIC), so if you invest that amount or less, you may get a positive, risk-free, real return! The “real” part is not guaranteed — inflation could increase — but the principal you invest in GICs is essentially risk-free, as the CDIC’s expenditures are backed by government taxing power.
Another good asset class to invest in is utility stocks. Such stocks enjoy very stable revenue, because they tend to be “natural monopolies,” offering essential services. You can buy an index fund consisting of all utility stocks and enjoy consistent dividend income. The companies in such a fund tend to be very stable and reliable.
Consider Fortis (TSX:FTS), for example. It is perhaps the most reliable dividend stock on the TSX. It has raised its dividend 50 years in a row, and management aims to keep raising the dividend by 4-6% for the next five years.
Fortis stock is fairly cheap today, trading at 18 times earnings. That’s not dirt cheap, but it’s nowhere near the price tag that tech stocks command these days. Despite its cheapness, Fortis is growing. Over the last 12 months, its revenue grew 12.5%, and its earnings grew 6.5%. The earnings-growth rate is faster than the planned dividend-growth rate, lending credence to the idea that Fortis will keep increasing its dividend in the future. On the whole, it’s a quality stock.
Before you consider Fortis, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in October 2023... and Fortis wasn't on the list.
The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 25 percentage points. And right now, they think there are 5 stocks that are better buys.
See the 5 Stocks * Returns as of 10/10/23