|Ken Stern, Aligned Capital PartnersNo Panic, No Sell. No Sell, No Lose!With the summer doldrums and lots of people being away on holidays, we’re in the right frame of mind to deal with an event that seems a lot worse than it is. Since the 2008 stock market crash, share prices have been up in five of six years (2011 wasn’t great) and we were due for a pullback.
At this juncture, barring an unforeseen shock, we believe this is a market correction – not the start of a bear market which is typically induced by a recession. Global growth, although tepid, is still positive and monetary policy remains supportive in the major economies. The US and UK in particular are showing some momentum while the recent economic news out of the Eurozone has been encouraging.
Now that the correction is here, you need a strategy. How about enjoying the last two weeks of summer and leaving the markets to do what they will? Stocks may get pounded, but there’s nothing happening that suggests a sound investing plan needs to be gutted.
The global economy tanked during the 2008 global financial crisis but one piece of good global economic news from back then was China was still going strong. Now, China’s struggling to maintain its growth rate, and investors are worried about the implications for growth and corporate profits around the world.
Here in Canada, we’re hit especially hard by troubles in China. Almost 30 per cent of our stock markets are tied to energy and metals, which depend on strong demand from China. And China’s slower rate of growth is a big reason why oil and energy stocks have plunged.
If you’re thinking about abandoning your holdings of stocks and bonds and moving to cash, DON’T. Ninety-nine of every 100 investors won’t get it right.
Those who take this type of action, against all conventional wisdom, will lock in losses by selling low and then probably buy back into the market long after it has rebounded off the bottom. Your portfolio is based on a sensible mix of stocks and bonds, built to withstand times like these.
What should change are your expectations for investments in the next few years – it’s best if you dial them down. The S&P/TSX composite index delivered double-digit total returns (share price changes plus dividends) in 2009, 2010, 2013 and 2014. The three year average annual return to July 31 was 10.7 per cent. Until the global economy breaks out of its funk, 5 to 6 per cent is a more realistic average return.
Fearing the kind of losses we’ve seen this month, many investors have been holding large amounts of cash in their portfolios. We’re coming to a fork in the road for cash-heavy investors – either you decide to stay safe for the long haul and accept returns that lag inflation, or you plot a way back into markets that are getting less expensive by the day. Figure out how much you want to invest and set up a schedule to start building a position. Consider dollar cost averaging into your positions by buying some every month – that way you avoid stressing yourself about making a big purchase just before another market plunge.
Stocks have been correcting so far, but don’t rule out a more intense decline. I’ve been an investment adviser through two major market crashes – 2000 and 2008. In hindsight I always end up with some feelings of regret. Why didn’t I buy more when prices were down? This could be your opportunity to buy higher quality investments at lower prices.
In the unlikely event this turns into a bear market or not, this is a good time to remember a well-diversified portfolio has always recovered from its declines and gone on to new highs, and although there are no guarantees, that continues to be our view.