Weekend Reading – More market volatility on the way
Most days, the stock market doesn’t seem to move very much. On other days, the market volatility is extreme.
Is more market volatility on the way?
Welcome to my latest Weekend Reading edition.
Let’s unpack that a bit.
More market volatility on the way
Generally speaking, any key Canadian (or U.S.) stock market index like the TSX 60 here or the S&P 500 in the U.S. doesn’t move too much, usually less than 1% +/- each trading day. Yawn.
However, over the last few weeks, we’ve seen HUGE daily swings. A few weeks back, U.S. and global stocks fell significantly causing (some) widespread panic (by some investors). I remember for one day alone, the S&P lost something like 2.4% of its value and worse-still, the tech-focused NASDAQ fell almost 4% in one day.
For those of you who love Facebook (I don’t…can’t stand what the company values…), the parent company lost over $200 billion in market value in just one day!
I suspect more market volatility is on the way for us, for a few reasons:
- Markets (and investors in it) like stability. These are not stable times. You have the U.S. Fed Reserve constant commentary (and inaction to date) on inflation, continued supply chain disruptions, an emerging crisis in Ukraine and here at home, lots of protests as we try and navigate yet another pandemic wave. When things are a bit predictable, there is less stock market volatility. The inverse is true now.
- Back to inflation, with inflation running higher than in three decades, investors seem a bit spooked about what might or might not happen when it comes to future interest rate hikes. In Canada, I can’t see our Bank of Canada being anything but a consistent follower to the U.S. – so as U.S. interest rates go, so goes our monetary policy. We’ll see in a few months if I am right or not, but I have been so far.
More reading: my rates to nowhere edition.
- Finally, stock market valuations seem out of whack to me. I’m far from an expert stock genius yet I don’t believe it’s ever realistic to expect any stock market index to go up year-over-year by 20% or 30%. I’ll reference some top-of-mind U.S. data here whereby I think we’re due for a correction or more:
- Typically, over decades, the U.S. market “corrects” every two years or so.
- A “bear market” occurs every 7-8 years.
- A “big crash” occurs about every 12 years; at or greater than a 30% drop/freefall.
Check out Ben Carlson’s stellar site for more details and facts on this: how often should you expect a market correction.
So, all this to say, with political and monetary uncertainty, inflation not being tamed and the fact that we’re all essentially due for a stock market correction at least – I’ll keep betting on more market volatility ahead.
The bigger question might be – how are you going to manage more market volatility on the way?
Here are my top suggestions and what I am doing personally:
Key Theme #1 – Learn to live with stocks. That means:
- Embrace correcting or bearish markets – they will happen. Consider a falling market like a shopping sale. Everyone likes deals. So, consider a falling market like getting a deal. Go shopping, get your goods on sale.
- If you’re not buying stocks on sale – your asset mix might be out of whack. We’ve heard ad nauseam to consider building a diversified portfolio based on your tolerance for risk. So, it’s important to know your comfort level with temporary losses. If a 10% or 20% market drop really worries you, that’s a perfect signal that you’re not comfortable with your asset allocation now. Something to consider changing before new calamity hits.
- Stay invested at almost all costs. Equities will rise and fall, and then they rise again. See Ben’s post above. So, while the talking heads will talk (a reminder they have to put food on the table as well!), you can largely tune-out any stock market commentary.
Key Theme #2 – Build-in relevant protection. That means:
- Keep cash. Consider keeping some money (how much depends on you!) out the market – avoid being invested 100% without any cash around all the time. Consider keeping some cash for investing purposes outside your normal “emergency fund”. Keeping some cash will allow you to purchase more assets without selling existing assets. Use this cash to grow your portfolio. You might have read more millionaires were created during the Great Depression than any other time in history – embrace some market chaos by keeping some cash on hand. History doesn’t always repeat but it rhymes.
- When in doubt, buy boring. Again, if a 10% or 20% market drop really worries you, change that allocation or invest in a way that delivers ever growing income.
Here are some ideas, to invest in dividend paying stocks that reward shareholders year-after-year.
You can also consider following this BTSX (Beat the TSX) strategy that, well, beats the market!!
Aligned with those stocks above: people will bank, people will use electricity, people will heat and cool their homes, people need medication and healthcare, people need to eat. Own investments that won’t go out of style without a huge fight or without a massive shift in our economy. Just thinking out loud for you 😊
- Build-in protection against significant losses. Modest temporary losses are one thing, but recovery from significant losses can take years. Traditionally defensive asset classes (read in some cash, see above, and short-term fixed income) can help when stocks are down. When used for diversification purposes, the combination of cash and/or short-term fixed income can help buffer a portfolio against the effects of up-and-down markets. Again, that asset allocation is up to you.
Further Reading: Are we headed for another lost decade???
More market volatility on the way summary
Stock market volatility is essentially the price you pay as an equity investor – the frequency and magnitude of price movements, up or down. Plan accordingly.
My friend Tawcan shared 6 stocks he wants to buy more of in 2022.
I put up a similar post on my site, and a few stocks are already taking off from my list in 2022.
Thanks to Zoomer magazine for including some of my inflation busting tips. Positive change including inflation-fighting financial change starts small, build from there.
Does the stock market have you spooked? Dale Roberts has some answers.
Over at Cashflows & Portfolios we wanted to help you avoid these big 5 TFSA mistakes.
Family Money Saver reviewed 5 defensive picks, one year later.
MoneySense always does a fine job in trying to make sense of the markets.
Dividend Daddy is absolutely rockin’ and literally rollin’ in dividend income – over $7,000 earned in January 2022. That’s incredible.
In closing, here are some fine reads from 5i including how we broke the supply chain.
More income and retirement content
From the retirement files:
How to invest for retirement when time is no longer your friend?
How I invest in dividend paying stocks is always found here.
Why I invest in low-cost ETFs – along with dozens of articles about ETFs can be found here.
Looking for free calculators, tools, or even my support? Check out my Helpful Sites page here.
Save, Invest, Prosper!
As always, check out my Deals page.
Have a great weekend!
With volatility there is opportunity, are the protests an opportunity (?). What kind of impacts will we see, short / mid and long term. Will we see changes in governance?
I’m all for waving placards / singing / chanting slogans. Go for it.
Shutting down rail lines (2020 protests) and border crossings 2022. Maybe not so much. The Nation State allows quite a bit, when you poke the State directly in the eye, expect a response. Should it have gotten this far, No.
With you on FaceBook, aka CrackBook, but then again I’ve got zero social media. In fact after watching lots of live streams from Ottawa, and news clips from CTV / Global / CBC. There is a big gulf in the story telling from each sides perspectives. This does not bode well for society. Leadership is a challenging position, can we please have some. And I’m talking about all areas of this, protest / Government / 4th Estate (ie media)
Can’t stand FaceBook myself David – the only reason I keep it is to remind me of my broader family/extended family birthdays and celebrations so I don’t miss too many shoutouts to them. That’s it. I don’t use it and haven’t changed my profile there in probably 5-7 years….
I like Twitter for news/feeds but then that’s about it.
Some real leadership would be good. The Ottawa Police Force management team all needs to go. The response to my downtown occuaptation going on 3-weeks now was both very predictable and arugably complicit. They are totally inept.
Not easy times.
More volatility coming for sure. If Russia does invade Ukraine, it is almost certain a market crash would happen temporarily. Oil & gas stocks would spike and the rest would tank. Hope it does not come to that. May peace reign in the world.
I hear ya Ken, I want to see more peace vs. polarization or worse. Fingers crossed.
Great advice: look at a falling market as a sale. I love that. And thanks to you and the other common sense financial bloggers (FT is great too) its what I do. A nice dip of 2-5% in the market over a couple of weeks and I snap up a few more ETF’s that make sense to me. Even if they bottom out lower its fine, as long as I get them on the slide. I’m not into the weeds as much as you on the dividend stock picks, but good ETF’s: dividend and indexed, have served me VERY WELL over the last 5-10 years. I probably have too much money washing around me at the moment thanks to a stable job and COVID, but its nice to have in these uncertain times.
Thanks Chris – who doesn’t like getting stuff on sale?? 🙂
I have no doubt if you keep a good savings rate, that investing in “good ETFs” such as dividend ETFs in Canada (e.g., VDY, XIU) and broad indexed ones (e.g., VTI/VUN, XUU, ZCN in Canada, etc.) will serve you VERY well long-term.
The last 10-years or so of “boring” market returns have been outstanding overall.
Wondering if your train of thought is being disturbed of late as i believe you live pretty close to downtown Ottawa?
Saw you article in Zoomer. Said ‘Hey. I know that guy! LOL
Had a look at Dividend Daddy. Quite impressive work. Do you know how old he is?
I’m retired so not expecting great things from my portfolios as they will eventually be on a downward slope due to the mandatory withdrawal rates (more than 4%). However, my mandatory withdrawals are at present (should I thank Covid?) less than what I spend. So the excess is going in to an un-registered portfolio. Minimal at present but never the less an extra approx $150 a mth.
Portfolios are just increasing in value of late. It’ll stop sometime but in the mean time it is looking good.
I think Daddy is in his mid-40s but not sure. He has an incredible savings rate.
Thanks for the kind words on Zoomer. Has, yes you do know “that guy”!
We’re far enough away from downtown to avoid the entire mess, but it is a significant mess.
I think you’re smart to fill up any non-reg. account over and invest in a tax-efficient way there. As you know, RRSP/RRIF is a deferred tax liability.
Have a great weekend,
You mean your mandatory withdrawal are more than what you spend, so you have some excess?
There is a high possibility that your portfolio (both reg and non-reg together) will continue to increase. I remember with 4% rule, more than half time people ends up with a bigger portfolio than when they retired.
Over the past year I have had very little need to use the RIF/LIF withdrawals to pay anything. The only exception was for the replacement heat pump. Even then I still had enough left over to put in to the non-registered portfolio. So that was in June/July of 2021. Since then I have been quite comfortable with the monthly “guaranteed” payments from QPP, OAS, CPP (very small) as well as a small company pension. Probably the main reason for this is that quite simply you can be hard pressed to spend your money (wisely) with all the Covid restrictions around.
At any rate for my mandatory withdrawal this year I took just 1/2 of the RIF payout, didn’t pay any tax on it (yet) and put that in to 1) increase the cash wedge for up coming income tax 2) Max out the TFSA and invest that and finally 3) put the leftover in to the non-registered portfolio and invest it as well.
The remaining mandatory withdrawals will probably be in November at which time I will pay the income tax for 2022 and re-invest the rest in the non reg portfolio. So for sure the non-reg portfolio will be disbursing more dividends in the future which will obviously mean less reliance on the RIF/LIF withdrawals and that will probably lead to more dividends from the taxable account.
I hold enough cash in both the RIF/LIF for this year’s withdrawals so if the markets were to go to hell I would be OK for a good year and a half before having to touch any stocks. Doubt that will happen to that bad an extent.
By keeping the cash in the RIF/LIF I do not need to re-invest it in the taxable portfolio while at the same time it is a cash wedge. I plan on re-investing approx 4-5 months of dividends within those two portfolios over the next few months and then settle in to building up for next years withdrawals which more than most likely will be higher than this years.
May run up against the OAS clawback either this year or next unless the markets tank.
I get to invest >$18K yearly in theTFSA with the annual contribution. It is generating over $1K per month at present. So even that is one heck of a cash wedge when the divs come in. Obviously I don’t use them as there is enough cash around to cover pretty well everything I want to do. Don’t live lavishly but if I want something (after some thought) I can afford to buy it.
Next year should see more expenses as we like cruises and they don’t come cheap.
Last meeting I had with the CIBC advisor he said there was a good possibility I would continue to increase my net worth. Thought it was BS then. Not so sure now the way the markets are going of late.
Take care May. Enjoy the ride
“Facebook … lost over $200 billion in market value in just one day!”
Do the largest companies (which are consider growth stocks) in Canada every do that bad?
Nortel comes to mind.
Nortel for sure but then again, not many stocks in Canada ever get to $200B in market value. RY getting close to that (updated).