Nasty is the new normal for the stock markets, so prepare yourself.
We live in a world where you can wake up any business day and hear about a wave of global selling that sends stock prices down by hundreds of points. We’ll have up days, too, but anyone expecting that quiet, cozy stock market of yesteryear to return is bound for disappointment. Volatility rules. Investors, adjust.
Long term, stocks still make great sense. You can get dividend yields from great Canadian companies that pay double or even close to triple what you get from the safe government bonds investors are piling into right now. Long term, the world will solve its debt problems, economic growth will surge and corporate profits will rise. That’s the foundation of the next bull market, whenever it arrives.
In the near term, investors need to take a hard look at their ability to withstand the risks involved in stocks. If you’re good to go in today’s volatile markets, then by all means do some gradual buying of quality companies. A decade from now, you’ll wish you bought more.
But there’s a group of people out there who aren’t okay with what’s happening to stocks. They’re worried about permanent damage being done to their retirement savings and their kids’ registered education savings.
Decades of market history suggest the markets will come back. But what if today’s market ups and downs have killed your confidence? In that case, you need to fine tune your investing strategy.
Giving up on stocks completely may be the answer, but probably not. If you’re investing in bonds and term deposits, you’re making virtually nothing these days after inflation. You’ll need to save a lot more money with returns that low, and we all know people these days don’t easily find extra cash to invest.
A better approach is to ease back on your stock market exposure. Don’t sell investments that have fallen in price unless they’re flaky choices you now recognize were complete mistakes. Instead, when it comes time to add new money to your investments, choose bonds over stocks for a while. If you were at 70 per cent stocks and 30 per cent bonds, you might switch to a 60:40 mix (stocks/bonds). Just remember that the more conservative you get, the lower your returns are and the more you’ll need to save.
Of course, you can live the life of the stressed investor until such time as the stock markets settle down. Just remember that for now, nasty is the new normal.