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Every cell in your brain will scream for you to do something when the stock market crashes next time.
But smart investing decisions are never made under stressful conditions. The time to prepare a portfolio for rough times is when things are awesome, such as now.
Consider this if you think Canada is broken: The S&P/TSX Composite Index TXCX was up about 24 per cent for the first nine months of 2025, with an annualized total return of 16.7 per cent for the previous five years. The U.S. benchmark, the S&P 500 Index INX, lags this year, but it’s roughly even for the past five years when measured in Canadian dollars.
Stock market strategists have their theories about why stocks are so strong, including massive investments in artificial intelligence, the expectation that interest rates will keep falling and the resilience of the economy. But those five-year returns are better than double the long-term average for stocks.
Opinion: This stock market boom is on borrowed time. And the bill keeps rising
This cannot and most certainly will not last indefinitely. Prepare now for declines to come by:
Checking the liquidity of your holdings
Nearly everything in investing is working right now, which increases the confidence of investors and opens their minds to new products that have not been tested in a market crash. If you have any exposure to funds that hold private debt or equity, pooled real estate or other similar non-core assets, find out now whether it’s possible that redemptions could be limited in a market panic. This isn’t a call to redeem now, just a warning that the exits might be blocked in future if investors flee en masse.
Identifying your portfolio pain points
Got any star stocks or funds in your portfolio? The more speculative or niche-oriented they are, the harder they’re likely to fall in a market downturn. Now’s the time to consider taking profits, even at the risk of missing out on future gains. Buy and hold indefinitely is for core holdings such as proven stocks and funds that invest in them. Curb any expectations that the latest generation of speculative or meme stocks will rise again.
Rebalancing
Hard-charging stocks can disrupt the asset mix that best reflects your appetite for risk and portfolio needs. A 70-per-cent-30-per-cent mix of stocks and bonds could easily be pushed to 80-20 if you let the stocks run and don’t add to the bonds. Bonds are having an okay year. Expect better if stocks tank, especially if that happens alongside an economic slowdown.
Keeping cash in your RRIF
A well-designed registered retirement income fund includes enough cash to cover at least two to three years of mandatory withdrawals. Cash investments such as money market funds and high-interest savings accounts for investors don’t pay much more than 2.2 to 2.5 per cent these days. But you won’t care about that if stocks are sinking and you need to make an RRIF withdrawal.
If stocks tank, do not expect the federal government to bail you out with a partial or full waiver on RRIF withdrawals. We’re still waiting to see if the feds follow through on a promise to reduce the 2025 mandatory withdrawal by 25 per cent. This offer was made when stocks briefly tanked in February as the trade war flared, but it is no longer warranted by current market conditions.
Appreciating your dividends
Quality companies pay dividends regardless of the broader stock market and even economic conditions. A 4-per-cent dividend yield couple with a 4-per-cent share price decline means you broke even. Be sure to factor dividends and interest paid by bonds and guaranteed investment certificates when looking at portfolio returns.
Preparing for a near-term slog, not a V-shaped recovery
A buy-the-dip investing strategy has been rewarded in the past two market downturns, which coincided with the start of the COVID-19 pandemic and the trade war opening. Stocks rebounded quickly after those setbacks – it’s called a V-shaped recovery. Prepare for the possibility of a U-shape next time. It’s never a bad idea to buy low, but you need to be willing to go 12 to 24 or more months before seeing the benefit.
Resisting the impulse to exit stocks
To be brutally honest, you shouldn’t be in stocks if you can’t take the pain of the next market downturn. Selling and then buying involves too much market-timing guesswork for even pro investors. Defend against a stock market crash by making the adjustments mentioned above, and through diversification involving stocks, bonds and a bit of cash. Every stock market downturn lays the groundwork for the next bull market.
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