Suze Orman’s tips on how to protect your nest egg against a market crash

How to prepare for a rainy day

Orman has three main recommendations for setting up a simple investment strategy to help you successfully navigate any sharp downturns in the stock market.

#1. Buy low

Part of what upsets Orman so much about the furor over meme stocks like GameStop is it goes completely against the average investor’s interests. (GameStop, a struggling video game retailer, became famous in early 2021 when its stock price skyrocketed due to a short squeeze that was orchestrated by a group of individual amateur investors.)

“All of you have your heads screwed on backwards,” she said. “All you want is for these markets to go up and up and up. What good is that going to do you?”

She points out that most savings that people use to invest are primarily allocated to retirement portfolios. In Canada, that means investing inside tax-efficient accounts, such as the Registered Retirement Savings Plan (RRSP) or the Tax-Free Savings Account (TFSA).

What many people don't understand is that the RRSP and TFSA — along with a variety of other tax-efficient accounts — are not products, but vehicles that let you do more than stash cash. Investors can also hold investments within these accounts (as long as you follow contribution and withdrawal requirements).

Because you probably don’t plan to touch that money for decades, the best long-term strategy is to buy low, explains Orman. That way, your dollar will go much further now, leaving plenty of room for growth over the next 20, 30 or 40 years.

Read the Money.ca guide on what is an RRSP to learn more about how to use this retirement saving tool or get familiar with TFSA rules.

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#2. Invest on a schedule

While she prefers to buy low, Orman doesn’t recommend you stop investing completely just because the stock market is on an upswing.

Again, she wants casual investors not to get too caught up in the daily ups and downs of the market.

In fact, cheering for downturns now may be your best bet at getting a larger piece of very profitable investments — like some lucky investors were able to do back in 2007 and 2008.

“When the market went down, down, down, you could buy things at nothing,” says Orman. “And now look at them 15 years later.”

She suggests you set up a dollar-cost averaging strategy, which means you invest your money in equal portions at regular intervals, regardless of the market’s fluctuations.

This kind of approach is easy to implement with any of the many investing apps or robo investing sites currently available to DIY investors.

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#3. Diversify with fractional shares

To help weather dips in specific corners of the market, Orman suggests you diversify your investments — balance your portfolio with investments in many different types of assets and sectors of the economy.

Orman particularly recommends fractional-share investing. Fractional share investing allows you to buy a portion of a share rather than a whole share. This approach makes it possible for individuals to invest in high-priced stocks without needing to purchase an entire share, which you otherwise wouldn’t be able to afford.

With the help of some stock-trading tools, a person with any budget can afford the fractional share strategy.

“The sooner you begin, the more money you will have,” says Orman. “Just don’t stop, and when these markets go down, you should be so happy because your dollars find more shares.”

“And the more shares you have, the more money you’ll have 20, 40, 50 years from now.”

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What else you can do

First, prepare for the worst and hope for the best. If there’s one thing that the pandemic should have taught us, is that it’s wise to have a large emergency fund, ideally one that can cover your expenses for a full year.

Then, to set yourself up for a comfortable retirement, you should opt for a TFSA or an RRSP. A TFSA will help your money grow because you don’t have to pay tax on the interest, dividends and capital gains, allowing your investments to grow tax-free. RRSP contributions, on the other hand, are tax-deductible when you make them, but you will pay taxes on the withdrawals (aside from some rare exceptions) during retirement.

If you find you need a little more guidance, working with a professional financial advisor can help point you in the right direction so you can confidently ride out any market volatility.

While everyone else is veering off course or overcorrecting, you’ll be firmly in the driver’s seat with your sunset years planned for.

— with files from Romana King