Stock market panics are nastier than you know.
They decimate your portfolio, and then they entice you into making bad investing decisions that ease your short-term anxiety but hurt you in the long term. That's how it is that investors sell perfectly good stocks and mutual funds, buy principal-protected investments and make other mistakes with lasting repercussions.
Selling quality right now is probably the worst error you can get fooled into making by a plunging stock market. The rationale here of protecting your money against further losses makes sense, especially because it's hard to imagine there aren't more bad days ahead for the market.
But what comes after that? If you sell today you'll have your money sitting in money market funds, where returns are on the decline because of falling interest rates. You'll eventually get an itch to find something with a higher return and quite likely you'll end up in the stock market again. By then, stocks will have jumped from their lows and you'll be buying at elevated prices.
Some people, amateur and professional, get lucky timing their moves in and out of the market. The masses get it wrong and thus end up in a cycle of selling low and buying high that robs them of returns and extracts unnecessary fees and commissions.
We're talking about quality funds and stocks here - the sort that form the core of your portfolio. If you have more speculative stock investments or money in funds that focus on a sector or individual country, then consider selling some or all of your holdings. That way, you either lock in what remains of your gains (you may still have quite a lot if you bought a few years ago) or cut your losses. Tempted to hang on to a big-time loser in your portfolio? Lots of Nortel Networks shareholders know all about how well that can work out.
Another mistake is to completely give up on the risks of the stock market and instead buy guaranteed investments like principal-protected notes. The appeal of these investments is obvious - you get exposure to stocks with no risk of losing money in down markets like we're seeing today. But there are two key drawbacks that disqualify guaranteed investments from serious consideration.
One is that you could end up holding one of these investments for three to five years without making a cent. Risk-averse investors would be better off today with a term deposit from an alternative bank or credit union (deposit insurance is a given). For a term of three to five years, you can get annual returns of as much as 4 to 5 per cent.
The other drawback is the cost of the guarantee and other fees and conditions that limit your returns.
Why do you think so many banks, insurers and fund companies are involved with guaranteed investments - they're a huge money maker.
Buying principal-protected investments now makes less sense than usual because the stock markets have already lost a lot of ground. They may fall further, but savvy investors know that the current decline is setting up the next move higher. Sellers of guaranteed products will make out like bandits when stocks rebound. Investors, not so much.
Lapsing into a state of paralysis is another mistake of the overly cautious investor. Don't take a flying leap into any stocks right now because more dark days are probably ahead. But buying a little here and there can set you up in blue-chip stock positions you'll hold for decades.
Pay special attention to companies that regularly increase their dividend payout. With their beaten-down share prices, these stocks offer yields that are very competitive with GICs and bonds in some cases. With their dividend growth, they offer the promise of rising yields over time that will help propel the share price higher. Financial stocks like Power Financial and the big insurers and banks fall into this category, as do the likes of Shaw Communications, Empire Co., Toromont Industries, Brookfield Properties and Canadian National Railway.
The fact that registered retirement savings plan season is just under way sets up the potential for yet another mistake by investors unnerved by the markets. They may be tempted to forgo making an RRSP contribution, or to invest their money in something utterly safe and unproductive, like Canada Savings Bonds.
If a plunging stock market is freaking you out, park your RRSP money in a high-interest savings account until the market settles and then move into a long-term investment as soon as you can.
Don't let your money just sit there for years on end - you'd be depriving yourself of the higher long-term market returns needed to fund your retirement.
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Dividends on the cheap
Here's a list of hard-hit dividend growth stocks, which are defined as having a history of regularly raising their quarterly cash payouts to shareholders. Rising dividends mean more income for investors, but they also help sustain higher share prices.
| Company | Ticker | Yield | Price | YTD % decline |
| Atco Ltd. | ACO.X | 1.8 | $46.30 | -16.1 |
| Brookfield Properties | BPO | 3.2 | $17.58 | -8.5 |
| Cdn National Railways | CNR | 1.9 | $44.42 | -4.8 |
| Empire Co. | EMP.A | 1.6 | $40.85 | -4.6 |
| Enbridge | ENB | 3.2 | $36.72 | -8.2 |
| Great-West Lifeco | GWO | 3.4 | $31.04 | -12.7 |
| IGM Financial | IGM | 4.2 | $42.80 | -14.5 |
| Metro Inc. | MRU.A | 1.8 | $25.90 | -1.7 |
| Shaw Communications | SJR.B | 3.7 | $18.59 | -21.4 |
| Toromont Industries | TIH | 2 | $23.60 | -16.5 |
| Toronto-Dominion Bank | TD | 3.5 | $61.48 | -11.5 |
SOURCE: GLOBEINVESTOR.COM
