Weekend Reading – More market volatility on the way

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?

You bet.

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:

1. 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.
2. 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.
3. 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:

1. 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.
2. 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 😊

3. 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.

Weekend Reading…

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!