With the recent market volatility, it's good to remind ourselves of some of the strategies we can take to help deal with the ups and downs of the stock markets. First of all, let's go back to the definition of a "market correction".
A market correrction is generally defined as a 10-20% drop in a stock market.Since 1928, a 10%+ drop in the markets has happened on average once per year. Of course, that can mean twice in bad years and none in other years. Because the US markets hadn't had a market correction since 2009 (the 3rd longest run in the last 50 years) and the Canadian stock markets have only experienced 2 corrections (2011 and late 2014), a correction in 2018 had been widely anticipated.
Historically, market corrections often look like "blips" on a graph of TSX or Dow Jones performance over a 50 year period. But they can feel painful while you live through them. Here are 7 strategies that can help you reduce anxiety and potentially take advantage of a market correction.
1) Turn off the news and be careful who you listen to. Dire predictions of "experts" are often made to sell newspapers or raise television and radio ratings. Listening to doomsday updates by your neighbour or brother-in-law will only add to your anxiety. Choose your sources for information carefully and, over enough time, it will all work out.
2) Speak to your advisor to see if you need to re-evaluate your portfolio or adjust your financial plan. Of course, the best time to review and re-balance your holdings was probably before the correction at your last annual review. If you and your advisor have done this and your plan is on track, it may mean the proper action now is to take no action at all. Even if you do nothing, you'll feel better understanding your advisor's strategies again.
3) Stay diversified and invested. Most portfolios will have a combination of stocks (equities) and fixed income (bonds) from across Canada, US and globally. While we cannot completely insulate ourselves from volatility, a well diversified portfolio will moderate the impact. Remember - volatility is the price we pay to do better than a 5 year GIC at 2-3%.
4) Create income in your portfolio that can be reinvested. Dividend and interest paying investments create cash that can be re-invested in lower priced funds or stocks and, ultimately, help with your portfolio recovery.
5) a) Direct your regular pre-authorized contributions to buy equity funds. Your $100 or $500 or $1,000/mth buys more units/shares when the market is down and less shares when the price is up. Re-balance annually to ensure your portfolio doesn't become top heavy with equity funds.
b) Retirees can draw monthly income from non-stock market investments. It's better to withdraw regular income from the fixed income or cash parts of your portfolio and allow the equity parts of your portfolio recover from the correction. Rebalance annually to replenish the fixed income from the growth of your equities.
6) And did I mention rebalance annually? I apologize for mentioning this a 3rd time but that's how important it is.
By staying disciplined to re-balancing your portfolio back to original portions of equities and fixed income, you automatically "sell high" and "buy low". End of story - no speculation - no news from BNN or CNBC required to make the decision.
7) Consider selling losses on non-registered accounts for tax purposes. Losses can be used going forward or you can re-file back 3 years to offset taxable capital gains, Typically, this strategy is applied late in the year so discuss with your financial advisor before December to review your options.
As usual, speak to your financial advisor for advice specific to your situation. If we can be of assistance, feel free to call or e-mail our office. We'll be happy to help!