How to survive today’s volatile markets

Is this the end of a multi-year bull market?

Is this the beginning of another bear market?

Is this a market correction or a market crash?

Let’s face it folks, for the last 5-years the stock market have been pretty darn good.  If you don’t feel this way you’ve obviously been invested in the wrong stuff over that timeframe.   Stock prices since “The Great Recession” have surged as have home prices.  It’s been a great time to be an equity or real estate investor. Maybe the only downside during this period has been prolonged, low interest rates – great for those that like leverage (or don’t fully understand it).

Recent stock market volatility always paints a different story in the short-term but in the long-term this time it’s not different.  You should know by now the stock market over the short-term is a voting machine and over many years and decades it is a “weighing machine” as one investing genius puts it, meaning eventually, it will make money for investors who buy-and-hold diversified assets long-term.

In recent weeks let’s look at some investing mistakes folks might have made:

  • When stock prices go down, money tends to flow into bonds. While that’s a good thing to make some investors “feel safe” I try to avoid this personally.  This means some investors are selling equities as prices fall and buying other assets (bonds) as they go up.  You wouldn’t really buy more groceries when prices are on the rise; you’d rather buy groceries when they are on sale right?
  • Some investors have been investing in high-yield bonds in recent years, drawn to them because of dirt-low bond yields and cheap borrowing rates. I personally avoid all high-yield bonds because they have similar risk characteristics to stocks; so why bother with high-yield bonds anyhow?  That’s just my take.
  • Some investors have been gravitating to dividend paying stocks in recent years. Good on them.  I’ve read some articles that said these stocks have been the “refuge of choice” for investors who dumped bonds.  Well, bonds are not stocks including dividend paying stocks so I’m not why articles write about such nonsense.

All this does beg some questions, how does an investor survive today’s volatile markets?  Borrowing rates remain very low yet equity prices are falling?  What to do?

Investors can survive today’s volatile markets by doing next to nothing or better put:  nothing new.

On the subject of interest rates while they play an important role in the economy as part of monetary policy, prolonged low rates are not really a good thing in my book.  They hurt folks with fixed income assets like bonds and saving accounts.  Prolonged low rates also do not reward any fiscal responsibility such as paying down debt.

Since I cannot control interest rates I’m going to continue doing the following in a volatile stock market:

  1. Continue to pay down our mortgage debt using lump sum mortgage payments.
  2. Avoid using our line of credit and carrying any other debt.
  3. Rinse and repeat items #1 and #2 until all debt is gone.

This way, if and when interest rates change I’ll own less debt and have more equity in my home.

On the subject of falling stock prices, I’ve trained my investing brain to celebrate times like these.  When equities fall, I try and find money where I can to invest in the stock market instead of running from it.  Since I cannot control the rate of my investment returns I’m going to continue doing the following in a volatile stock market:

  1. Buy indexed equity ETFs and some individual dividend paying stocks when I have enough money to invest.
  2. Continue to reinvest the distributions from these ETFs and reinvest dividends from the stocks I already own each month and quarter.
  3. Rinse and repeat items #1 and #2 until I have enough assets in my portfolio to retire.

The way I see it, watching the stock market correct or crash or anything in between is a perfect time to celebrate because equity items are on sale.  I will use these opportunities to diversify our Canadian and U.S. stock holdings and invest more in ETFs for extra diversification.  I intend to survive today’s volatile markets by doing absolutely nothing new.

How do you react to stock market volatility?  Do you see things the same way I do?

30 Responses to "How to survive today’s volatile markets"

    1. Exactly. As an investor in my accumulation years, I want to buy assets when they are on sale, not when they are priced high. You need some emotional discipline to pull it off though.

      Reply
  1. The recent dip was interesting for me because I had a much smaller portfolio last time something like this happened, but in the end it’s just a blip and didn’t even end up being a great buying opportunity.

    The S&P 500 fell to a low of 1862.42 on Oct 15, a price that it last passed on Apr 16. On Mar 4 that price level was a record high.

    The TSX fell to a low of 13869.88 on Oct 15. It last passed that level on Feb 11, and on Jan 17 that was a 5-year record high.

    This gave investors a chance to turn back the clock and buy at this spring’s prices (not counting the half-year of dividends since then). However you would have to be watching the market very closely since it turned around quickly.

    A solid plan like yours is the best way to go, and if you can ignore the markets that’s even better since you’ll never even know why others were worried.

    Reply
    1. Great to hear from you Richard. I liken market corrections or dips or troughs to a “time machine”. When you can invest in one, and they do occur from time to time, it’s best to take advantage of them! 🙂

      Reply
  2. The one line of clarity that should be tattoo’ed on all investment advisors faces:

    Investors can survive today’s volatile markets by doing next to nothing or better put: nothing new.

    That is the preface for your book.

    Reply
    1. Same, and on top of that Dan, I wish I had more money to save and invest. Ah well, I will save what I can and then live my life. It’s not always about tomorrow because you absolutely must enjoy today.

      Reply
  3. Mark,

    “Investors can survive today’s volatile markets by doing next to nothing or better put: nothing new.”

    Agree 100%. I would say the only thing I do differently is that I invest slightly more aggressively (deploy a bit more capital) when the markets are more volatile. Other than that, business as usual. 🙂

    Cheers!

    Reply
  4. Third bullet, I’m not sure what you’re saying:

    “Well, bonds are not stocks including dividend paying stocks so I’m not why articles write about such nonsense”.

    I’m allowing trailing stops to trigger sales of non-dividend paying stocks to generate cash to buy more dividend paying stocks. That’s not a new strategy, so I agree with your concluding statement: “I intend to survive today’s volatile markets by doing absolutely nothing new”.

    Reply
    1. Well FerdiS, I’ve read some articles in the past that remind people dividend stocks are not bonds. While both assets can and do provide income to investors, it is not the same and the risks for stocks are greater than bonds; likely always will be by definition.

      Nothing wrong buying more dividend paying stocks when things correct or crash; I’m there with you!

      Reply
  5. Great article Mark

    Same here for me. I am currently invested in VTI, VXUS and BSV
    I just rebabalance once or twice a year by selling the ETF that is outperforming or just adding to the lagging one if funds are available

    Cheers

    Sam

    Reply
  6. Hi Mark;
    Doing nothing turned out to be the wise choice in 2008 – 2009.
    I have recently read an article on why not to pay down the mortgage but rather invest the extra funds. Although this is fine as long as everything works out OK, a decreasing mortgage principle brings much peace of mind if any untoward situations arise – home repairs, new car, etc.You would be in better position to obtain the necessary funds (heaven forbid – borrow) to take care of the problem.
    As to your second point about not using a line of credit that is not valid in all cases. A line of credit utilized as investment money -stocks, property, heck even GIC’s (no sense to this last one because of the rates AND different tax treatment) may be a judicial use of funds as the interest incurred by it would be completly deductible.
    As an example I run a HELOC (@3%) costing me approx $3K in interest per year. I have dividends that have grown over the years to approx $12K. I can subtract the interest incurred from the divs leaving me with $9K in taxable income. As this income is all dividends they incur a lower tax rate that your salary would so I have more in my pocket so to say. This money is used to pay down the HELOC every month so if I wish to purchase another stock at some date, such as the recent dip. So, until such time as I pruchase more stock borrowing from the HELOC, my paydown of the principle is still paying me as there is that much less interest to pay on the HELOC evry month as the funds are lowering the principle.
    My objective with my portfolios, RRSP – TFSA and non registerd account is to grow dividends by 10% per year. From 2013 to 2014 I have just achieved that as of mid October with a few laggard stocks left till the end of the month and another two months of dividends to come in. I am projecting >25% increase in dividends.
    I am still working so I do max out both the RRSP and TFSA so helps as “new” money is contributed every January.

    Reply
    1. “a decreasing mortgage principle brings much peace of mind if any untoward situations arise” – Absolutely. This is why I don’t always like these pay mortgage vs. investing debates. If you can do both, you should do it but if you can only do one, kill the debt. Nobody wealthy that I know carried lots of debt for a long period of time.

      As for your dividend income, well done! I suspect we’ll be close to earning about $9,400 in 2014 by the end of the year.

      I will likely do some form of SM / HELOC once my mortgage is under $100k. Especially if borrowing rates remain low in a few years.

      10% per year dividend growth? That would be very good. I like buying the laggard stocks, more upside 🙂

      Can’t wait until Jan. 1 for TFSA – I love the New Year!

      Reply
  7. Great advice, Mark. Even though I write a lot about dividend investing and has been the focus of my blog, it is important to remember that stocks – dividend or otherwise, are no replacement for bonds.
    This has hardly been a crash – its a small correction and you can already see people running for the covers. Sitting still is what an investor should be doing and it still remains one of the hardest things to do.

    Best wishes
    R2R

    Reply
  8. $25k of stock sold in August 🙂 only because they were meeting my quality index criteria. Another $15k was also put on sale but never reach the right price 🙁

    Purchase some good stock at really good price:

    Alaris Royalties
    Intertape Polymer
    Groupe Canam
    Toronto Dominium

    Interesting is that all these stocks were on my purchase list when they were 10% higher. So not only they offer dividend and a solid dividend growth but they were available with a 10-15% premium.

    Not having anymore cash (not totally true, still have 5k$ left), I simply hope that the market will Bull again so I will be able to continue to sell my Non Quality Stock at a premium and get some cash to purchase good stock.

    Reply
      1. Probably yes. Maybe Canam and Intertape can be for the short run. If they reach 30% growth in less than a year, then they will be sold.

        Alaris and TD are there for many years. Good yield, good dividend coverage, good dividend growth and a good P/E. As long as these conditions are met, I kept them

        Reply
  9. “How do you react to stock market volatility? Do you see things the same way I do?”

    When it dips, I buy, when it raise I hold and/or sell some if there is any justification.

    The last blip was a shopping call 🙂

    Reply
      1. Thanks! No, I don’t buy US stocks and even less large caps, out of exceptions. Perhaps one day I’ll do, but until that I stick into Canadian markets. Just bought some mid/small and micro caps. I reinforced a few of my current holding positions too, but not in oil.

        Reply
        1. Fair enough…stick to Canadian markets. Any micro-caps you want to share? I’m sticking with mostly blue-chips for now and then everything else is indexed for simplicity.

          Reply
  10. We’re in it for the long run, so it doesn’t make much difference to me whether it’s bear or bull, except that I do take advantage of lower prices by investing more. I’ve got nothing but time – I’m young, and have a decent amount of disposable income so I’m just going to ride it out!

    Reply

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