“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Ben Graham, legendary investor, financial hero of Warren Buffett
I can appreciate these are trying times if you’re following the stock market, including watching your portfolio. World stock markets are blowing up.
There is slowing economic growth in China.
Crude oil prices continue their meltdown. U.S. oil prices traded below $40 a barrel recently for the first time since the 2009 financial crisis. Many Canadian energy producers have cut their dividends to shareholders. More dividend cuts or suspensions are likely coming in the months ahead.
Our TSX index fell almost 6% over the last week.
The S&P 500 suffered its biggest daily percentage drop in nearly four years – this index is also down close to 6% over the same one-week period.
The bull run is probably dead and the bear is growling.
Maybe you should sell equities and get out while you can? What about loading up on bonds?
Should you put more money under your mattress?
Of course you should do all of these things, if you have no financial plan in place.
If you have a financial plan (one that matches your tolerance for risk and addresses your long-term investment objectives) then you simply do nothing except for what your plan tells you to do. What the heck does that look like given the markets are blowing up?
I can’t speak for you but I can write about what we’re doing…
Stop worrying
I’m learning more (and still working on this…) to stop worrying about things I cannot control. I have no influence on what the stock market does. I can’t tell you what the price of oil will be tomorrow. I can’t forecast what dividend cuts might be coming. I don’t know what’s going to happen with our Canadian dollar. I simply don’t know, I can’t predict these things and they are totally out of my control. They are totally out of your control as well. I’m learning to stop worrying so much and simply stay the course we’re on.
Staying the course
We’re invested in a few low-cost Exchange Traded Funds (ETFs) that give us ownership in thousands of companies around the world. Collectively they are struggling now, in the short-term. Collectively though over 5, 10 and longer investing periods I have full faith these thousands of companies will not only survive but thrive. We invest in these ETFs for long-term capital appreciation.
We also invest in a number of Canadian and U.S. dividend paying stocks for passive income. We believe long-term, the 30+ established companies we own will not only continue to pay dividends in the future but also provide us with some capital appreciation.
Here are some elements of our financial plan:
- We stay away from complex investment products; I believe such products are designed to be “sold”.
- We understand that risk and expected return are related; if there is no risk then we cannot possibly have higher expected returns.
- We believe one of the safest things we can do is to diversify our equity holdings over time; amongst industry sectors, companies and countries.
- We live in a world without any magic 8-ball; we simply won’t know if our investment strategy is truly right or wrong until we know the outcome.
Image courtesy of Behavior Gap
Keeping it simple
Our simple financial plan could be explained to any 10-year-old. I like it this way. At least I can remember what we’re supposed to do in any given month…
- We continue to pay down mortgage debt, including making some lump sum payments on our mortgage.
- We continue to save money for investments in our registered accounts.
- We continue to reinvest all dividends and distributions paid for every investment (stock or ETF) we own.
That’s pretty much it.
Prudent investors recognize the difference between speculating and investing. To be successful we’ll need to stop worrying, stay the course and continue to keep things simple. That’s our system. I’ll let you know if anything changes.
What’s your plan for the markets blowing up? What’s your take on our plan?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
@Aiden: there most likely will not be a Great Sell-Off from the Boomers, and if there is it will have a much reduced effect than predicted.
Boomers will be retiring over the span of 20 years (including the next 15 years), and then selling off their equities over the following 20. So the markets have a good 35-40 years in which to absorb the sell-off.
As well, only ~40% of public equity is owned by households. I can’t see 100% of that being sold off; some will and some will be carried to inheritance. That said, even if all 40% of that stock was sold over the next 30+ years, there will be more than enough foreign and institutional buyers to keep things afloat.
Lastly, the current Millennial generation is even larger than the Boomers. So, again, lots of home-grown and foreign populace to soak up supply, provide growth, etc.
Hi Mark. As you know I’m just starting out on this journey and trying to absorb as much knowledge as possible. Not sure if these observations are framed properly but here goes…
I was wondering – you mentioned that the long-term investor doesn’t need to panic. But what about people who are very close to (or in the midst of) retirement and made some bad decisions in their portfolios (e.g. over-emphasis on risky stocks and not enough diversification). They might not have time for things to ‘bounce back’ and have to severely compromise their desired lifestyle.(Glad I am not in this bucket.) With the baby boomer generation entering retirement, could there be a lot of people in this boat?
Not sure if you blogged about this, but I’m also curious about what happens when all of the baby boomers retire and try to cash in on their investments in a relatively condensed timeframe… with fewer buyers fueling demand (at least, I suspect, in North America).
Good to hear from you Aiden!
Correct, during your asset accumulation years a long-term investor should avoid panicking when stock markets tank and try and train their investing habits as to buy when markets tank (i.e., buy items on sale).
During your asset preservation years an investor should adjust their risk tolerance in their portfolio as to avoid panicking when stock markets tank. If older investors, near or in retirement are worried about a 5%, 10% or more stock market decline (and these will happen), a couple of observations…
1) They are probably taking on too much risk in their portfolios, and/or
2) They probably didn’t save enough.
You are right, there could be lots of people in bucket 1) and/or 2). Many don’t even know it yet.
When Boomers retire (and they are), I believe we are going to see slower economic growth. Less people working, more retirees, less people to spend money, less manufacturing, less revenues, less stock market growth. I think we are starting to this trend that will exist for another 20+ years, already.
More on the “blowing up” bit…over the last 85 years the S&P 500 has experienced an average double-digit drawdown of 24% approximately every 2 years. This is not blowing up or melting down; this is regular, normal market behaviour, and it’s overdue (that’s to say what just happened was NOT the regular periodic drawdown we’ve been waiting for).
More surprising is that excluding the nightmare of the Great Depression and accounting for only the index fund modern era, 1970 onward, the markets saw an average decline of ~24% every ~2.5 years. In other words, the Great Depression exacerbated only the trend pace by 20%, but not the depth/severity.
If a 5% or 10% decline (after 4 uninterrupted up years) freaks you out…perhaps it’s time to reassess your actual risk tolerance.
(Note: this addresses only double digit losses but not double digit gains since upward volatility never seems to bother anyone or is ever considered “risk”. You can look those up for yourself.)
Well, “blowing up” was for the headline, but it was a 6% drop in one week. You don’t usually get that.
Personally I welcome lower prices in my asset accumulation years although I might not feel the same in retirement. We’ll see…
Based on most readings of financial history I expect to have 2-3 major “corrections” within every 10 year investing cycle. It’s just going to happen, history says so.
As you say, if you feel you need to sell stocks when the market falls 10% or more, you’re probably too heavily invested in stocks and need more fixed income.
Probably makes more sense Mark since its doubtful this province would ever lead in being tax advantaged. Although I’m not sure why when I used the actual Ont. income tax calculator to get to $0 tax the amount I indicated is what it came up with.
Unfortunately or probably more appropriately fortunately there is other income for us to consider beyond our non registered dividends. It does make a case to get money out of registered and into TFSA and non registered though.
Who knows about the rules especially if we have a change in Fed govt. I would welcome much more simplicity in our tax system. Ridiculously complicated for many years now.
Yes, Barbara there is a lot of good info on that site.
I think it’s fortunately re: “..there is other income for us to consider beyond our non registered dividends.”
This is exactly our plan as we get older, and into lower tax brackets: get money out of RRSPs + LIRAs and into TFSA and non registered. I plan to start that process when I stop working full-time.
Dear God, yes, anything that simplifies our tax code is a blessing. I suppose it keeps lots of people employed though.
I love that tax tips website and calculator! That is what convinced me that I needed to have more Canadian dividend paying stocks. Yes, taxes aren’t everything, but they certainly are something that you aren’t happy to pay every year.
Definitely CDN stocks as you know are tax advantaged in a non-registered account. Let’s hope our government doesn’t change the rules! CM and RY increased dividends this week…that was nice.
Answer for this retiree: Sit tight and enjoy the ride. This is all typical stuff happening.
Plenty of cash on hand to manage expenses.
No leveraged investments for this guy.
Mark, no tax on divvies up to $30,600 in my province. I think for yours its about $14,500.
I agree Gary!
Should be closer to $50K in Ontario Deane, with the gross-up at 1.38%:
http://www.taxtips.ca/dtc/enhanceddtc/amt.htm
Lots of dividends before you get taxed if no other income!
Great post Mark and very timely. Take it from a 9 year retiree; don’t get greedy, keep some cash ahead — atleast one year — for times like this. Cardboard box rentals skyrocket when markets tank! (:
I think that’s a great plan Gary, and I hope to have some sort of “Cash Wedge” myself as I approach retirement:
https://www.myownadvisor.ca/cash-wedge-opening-investment-taps/
I bought some ETF’s Monday and then a bit more after the DOW collapsed again Tuesday late in the day but after today’s surge upward do I wait for another pullback? Or continue buying into the recovery? I kind of don’t believe that one good day means the market will be stable and on the road to recovery. What do you guys think? More collapse ahead?
I don’t mind buying on dips because I cannot predict the future. I’m currently in savings mode for 2016 and unfortunately cannot afford to make any big purchases. I’m sure the markets will continue to be messy in another 4 months!
Oh yeah, a good first world problem ;]
Cheers!
Overall, we are VERY lucky in this country!!
I’m sorry, the previous comment is made by me. I entered the captcha code into the Name field, my bad…
Continue to buying cheap shares. it was my shopping days on Friday and Monday.
I blown my 2015 income target and tackle 50% of the 2016 one. I will have to readjust the 2016 goal on Dec 31 this year.
No doubt Tuesday morning was a good day to shop over the last few months! This is a good problem to have, to readjust your income goals for 2016 😉
Nice article Mark. Since we are in the accumulation phase, it makes sense that we should cheer for lower prices. This means our dollars can buy more stock and more future dividend income.
Absolutely time to cheer. Monday on the markets was a great gift. I simply wish I had more money to invest when the market corrects. Oh well, can’t have it all…need to be patient but also spend a bit of money and enjoy life. Life is short!
re: leveraged investing…it’s all the rage, don’t ya know (well, since the early ’80’s at least). Why do you think global interest rates are at all time lows (with a few countries running negative overnights!); why do you think the-sky-is-falling China just chopped their interest rates? So more money can be leveraged to boost the “economy”. LOL, he said dryly.
Of course corporations and governments get to operate much differently than you or I. Prudent leverage can be beneficial. Don’t borrow to buy a hot tip penny stock, borrow to buy a 4% dividend blue chip. If you loose your job, you’ll likely have a healthy asset which you can sell to cover the loan if you have to.
Did you fear taking out a mortgage to buy real estate? Why would you fear taking out a loan to buy stocks since you’ve already demonstrated a great faith by having 100% of your retirement money in that investment vehicle. If the money was free would you buy more stocks?
As for loosing your job, Freedom 35, with all his debt, has calculated all his costs could be covered for quite some time with investment income and unemployment insurance (did I just show my age?).
Like most things to do with money, you need to examine most facets before committing.
I think if I had less mortgage debt, I’d be fine with some leverage right now given borrowing costs are dirt cheap. This puts me about 5 years away from leveraged investing, in blue chip dividend paying stocks of course. Nothing with our jobs is guaranteed, so it makes me nervous taking on more risk than necessary.
Yes, given the size of our mortgage, I did fear that at the time! I’m feeling better now since we have more equity in the home than debt but we still have a good ways to go to slay the beast 🙂
“Like most things to do with money, you need to examine most facets before committing.” – agreed! Thanks for the dialogue SST.
While not conservative in my life, I am pretty conservative when it comes to money. I am not one to advocate leveraged buying of financial items. I actually never bought anything in my life that I couldn’t pay cash for except for property–our house and then a rental property.
It is particular to my circumstances that I did the borrowing and purchased a solid (I hope!) dividend paying stock. We have no mortgage and I am now trying to build up our retirement fund. Because I have very little income (stay at home mom) I realized (thanks to some bloggers and web sites) that I would actually pay lower taxes, if I had higher dividend income, so I thought I should go more for dividends than capital gains or rental income which is fully taxed. I have made withdrawals from my RRSP the last couple of years to spread out the income and thus tax rate, so anything I withdraw counts as taxable income.
For me it was about timing, I thought the stock price had dropped and then happened to see the 2.09% offered for two years and did the math. But I am pretty cautious overall.
I recall with little other income, you can basically earn close to $50,000 per year in dividend income, non-registered, and pay close to zero tax.
Capital gains however is the lowest form of tax, non-registered, as marginal tax rate on incomes rise. If you’re in a high tax bracket, it probably makes sense to look at Canadian equities that pay less in dividends and provide more appreciation; but overall, the dividend tax credit is a VERY favourable form of tax 🙂
I’m currently starting the process of renegotiating our mortgage. I really wish it was dead. I’m a pretty cautious investor myself Barbara. I will consider borrowing to invest when our mortgage is more manageable and depending upon rates at that time. We’ll see!
Sound advice! I remember when I started up as an investor! I would get worried almost every morning by a stock. So many mistakes back then… Fortunately, I’ve learned a lot.
Cheers!
Mike
Same, I feel like I’ve learned a lot about investing, and my behaviour as well Mike!
Barb beat me too it! I’m waiting for further collapsed levels to do the same — leverage into…something.
(For those of you interested in leveraged investing, visit the Freedom 35 blog, that’s his entire financial platform.)
I’ve read his site. Leverage can be scary. What happens if you lose your job?
That sounds like a good idea Barbara.
Would you suggest leveraged investing even with someone (like me) with mortgage debt? Just curious on your take Marko…!
I took out a loan last week for $30,000 at 2.09 % interest rate. Today I bought $20000 of a stock paying a substantially higher dividend than that. We will see how that goes! More Canadian dividends actually lowers my total income taxes paid and the interest is tax deductible. I will have to see what else I want to buy with the rest of the money.
Wow. I don’t think we can get into any leveraged investing until our mortgage is gone. That’s about 5-6 years away for us. The tax deductible interest is very appealing with these low rates right now though. Did you buy those assets in a non-registered or registered account? Interesting times in the market Barbara.
A person with money in the stock market should also verse themselves in the basic behaviours of said market:
The average “long-term” return of the market is ~9%/year, but per year the markets will only achieve this average ~5% of the time. In other words, achieving the average return over the short-term is quite rare.
One quarter (25%) of the years will give losses of 5% or more.
Since 1950, half (50%) of all years experienced corrections of 10% or more during the year; a full third (33%) of the years saw a correction of 15% or more.
If you are in the stock market you will get hammered, frequently. If you are fully aware of this normal market behaviour then there shouldn’t be any fear or worry, and your emotions won’t force you to do irrational things.
Keep calm and random walk on… ?
I like your Malkiel reference about the random walk…
Agreed, short-term, very difficult to earn your long-term stock market average. We might be in for a short-term wild ride.
I am 100% equities so I definitely see the bloodbath SST! Are you considering buying anything soon with the corrections underway? Or are you going to be patient and wait things out in the coming months?
Mark,
I am an income oriented investor with 38 very diversified stocks and a few ETF’S. Everyone of them is down considerably over the last month. Nothing has been spared.
John
We probably own many of the same stocks John, and maybe ETFs as well. Yes, the broader markets have taken a beating and I suspect, although I don’t know for sure, there is much more to come.
Mark,
Without a pension and retired for many years, a market like this is extremely nerve racking for me! If I was young and still earning an income I would love this kind of a market. It would be a great time to buy for the long term. I’m just wondering if I will have time to recover, especially if the market keeps dropping.
It’s easy to say “stop worrying and stay the course ” as long as you have a pension and are still earning income!
Don’t forget about use retired, no pension seniors when you make these generic comments.
Keeping my head down
Joh
Fair comment John. I’m sure I’ll feel different in another 20 years as well, pension or not. It makes me wonder if you have lots of equity holdings in your portfolio? Are you using an income-approach or total return approach? I could appreciate the latter might be quite stressful – your comment again is duly noted 🙂
Stop worrying and stay the course is sound advice. Thanks for the timely post!
Thanks James!
Only a problem if one is concerned about the market value of their portfolio. I’ve seen my dividends grow 15% ytd and there are still 4 months to go. Nice time to add to positions!!
I like your thinking Henry. If we weren’t saving for home improvements, I would have jumped at some prices today.
I’m 36 years old and feel that time is still on my side. I’m going to buy more this week and stick to my plan. Don’t panic, don’t sell, stay the course.
Totally agree Chris. I hope to have another 40-50 years to invest.
Another timely and relevant post from Mark as it looks to be a rough week.
I have had a $33K reversal in fortune since June 23, 2015 but it’s OK as I am following my plan as you had suggested
Very rough morning! People were losing their minds today. O&G stocks still down quite a bit. Great time to buy this fall/winter I hope!
I don’t follow any kind of fixed policy in my portfolio. I keep an eye on dividends, payout ratios and yields. If the payout ratios stay low, the chances of dividend cuts are smaller. So far, the income generated in my accounts has not changed at all. With prices falling, yields are rising so I will use some cash to buy from time to time in partnership with the DRIPs. Sure I’ll keep some cash (or nearly cash) in reserve (year or two worth) but I see no reason not to dabble now and then when the market is down.
You and I are the same Lloyd, I don’t follow any fixed income policy on the portfolio – I consider our pension the fixed income (some folks don’t agree with this but it works for me).
Yes, with prices falling or crashing then yields rise. Crazy what is happening today. People are losing their minds…
I think there is no problem for a long term investor:
cheaper stock is not an issue: dividend payments will continue. Just don’t sell.
If you have the discipline: don’t stop buying new stock. I must admit I mainly buy at rising markets, but you should be able to buy on a sliding market as well.
Bram
I would agree. For the long-term investor lower prices should be celebrated. I can appreciate this is unconventional thinking though.
Thanks for the article MOA. It’s times like these that tests our courage and gameplan. Just go with the flow and do not panic. Simple. If you’re invested in top quality companies, i say it’s time to buy more. It’s a game. The game is Volatile. Gotta be mentally tough for the stock markets.
I wish us the best and let’s keep it up and build our Net worth and Portfolio to greater heights. Cheers bud.
I think if you’re an owner of many O&G stocks then yes, these times will certainly test your courage! Thankfully I have some diversification so my entire portfolio is not crashing. Interesting times for sure…
Hi Mark,
Great post! In the past, before I became a DIY investor (thanks to blogs like yours), I would have been seriously worrying about my investments at a time like this. These days, I worry a bit, but mostly get excited at the prospect of picking up a couple of stocks or ETFs that I have been researching and patiently waiting for the price to go down on. Like you, I try to keep it simple. No one has a crystal ball – I mean who would have thought the price of oil would plummet like it has, or that interest rates would stay at all-time lows for so many years?
However, the low rates have made it possible to eliminate the mortgage faster!
Thanks Money Buff…(for reading…) and yes, I too am looking to buy more assets next month thanks to lower prices. (Currently saving.) When the stock market tanks it’s an excellent time to buy things on sale 🙂