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?