As headlines scream of plunging stock markets and growing financial unease, the sense of doom can be overwhelming.
Yet some people manage to sleep soundly at night. How do they do it?
Here are five lessons that have served our clients well in times of major volatility and nervousness.
1) Have a long term financial plan. I may sound like a broken record but if you have a 30-year plan that can be updated with your current investment values, you can get a pretty good picture of whether you are still okay. You can also get a good sense of how much investment risk you need to take to support a particular lifestyle. It shifts the focus away from the recent market volatility and puts it on the big picture.
2) Get the asset mix right before everything goes crazy. Ideally you have drawn up your investment asset mix after doing a long term financial plan. The key is to have the appropriate risk level, income yield, and geographic mix for your needs. This is especially important for any special-purpose accounts, like an RESP or money for real estate. By the time the market is really choppy it can be painful to make adjustments. Having said that, if you find that your current asset mix isn’t right for you on a long-term basis, then today is the day to adjust it. Don’t wait for a recovery, as the recovery could take some time to appear.
3) Truly understand your risk today. Some people don’t understand what they really own. They think they have a safer portfolio than they really do. One of the main culprits is a mutual fund that might say it is a balanced fund but isn’t. When reviewing Canadian Balanced funds for the past 30 days, I noticed that the Investors Canadian Balanced A fund is down 11.6 per cent. This seemed odd for a balanced fund. When I looked at the weighting of stocks vs. bonds as of April 30, 2011, the fund had 67 per cent in stocks and 20 per cent in bonds. If you owned this “balanced” fund, you might have thought you were not overly exposed to downside risk. You would be wrong.
4) Respect history: This time is NOT different. Sir John Templeton, the founder of Templeton investments, said the four most dangerous words for an investor are: this time it’s different. I agree. While the causes and details around a market decline change, the long term trend does not. Through wars, assassinations, dot-com bubbles, and real estate crashes, the market continues in a cycle of ups and downs, but with a general trend higher. This is because the market is made up of human beings who are ultimately driven by fear and greed. Unless human nature changes, market cycles will continue. As long as Global GDP trends continue to be positive, world markets will continue to trend upward over the long haul.
5) Get excited for rare opportunities. If you believe that this time is not different, then you will see the drop in stock prices as exciting, especially if you have some cash to invest. In March 2009, you could have purchased Bank of Montreal stock with a dividend yield of 11 per cent. That was a rare gift and a great opportunity. As stocks fall, look for more rare gifts. Today there are 49 companies on the New York Stock Exchange with a market cap of at least $10-billion and a dividend yield over 4 per cent. That is a lot of large cap income – especially when a five-year GIC rate is 2.85 per cent, if you are lucky. Today may not be the day to buy but when a great company will pay you a 5 per cent or 6 per cent dividend and the stock is 20 per cent cheaper than it was a few weeks ago, it starts to become compelling.
There is no question that a market meltdown can be a nerve-wracking experience. This is especially true for retirees. But if you follow the five lessons above, you may just make it through relatively unscathed. At the very least, you could sleep better at night.
Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm.
Follow Ted on his blog at The Canadian Financial Planner.