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You’re right to be nervous about your investments after the huge, widespread gains since the market crash of March, 2020.

Phenomenal returns have been generated by assets as varied as preferred shares on the conservative side and cryptocurrencies on the risky end of things. All of this while we’ve been fighting, with both successes and failures, against a global pandemic. Further gains are possible if there are positive surprises in how economies in Canada and around the world emerge from pandemic lockdowns.

But risks are also starting to emerge, notably an increase in inflation that causes central banks to crank up interest rates at a faster rate than previously thought, and to higher levels than anticipated. Given the uneven progress in defeating the pandemic, there’s also a risk of a COVID-19 flare-up that sets us back.

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These uncertainties were on the mind of a reader who recently posed this question: “With all the talk of the potential bursting of the bubble re the stock market, how should your average investor deal with it?” Here are four suggestions:

Trim your speculative holdings, and be ruthless

Market conditions of the past year have rewarded investments made on hype, hope and momentum. If you benefited, then think about locking down some profits by selling some or all of your speculative holdings. Ask yourself this about any of the high flyers in your portfolio: If the markets fell 20 to 30 per cent, how might this stock or fund perform? How did it do in March, 2020, when the bottom fell out?

Own bonds or GICs

The FTSE Canada Universe Bond Index was down about 4.5 per cent for the first five months of 2021, which is disappointing for a supposedly safe asset. Bond prices have fallen because interest rates in the bond market have moved higher. But if stocks plunge, money will flow into bonds as a safe haven. This, more than anything, is the reason to hold bonds or guaranteed investment certificates. How much exposure to bonds? The default portfolio breakdown has long been 60 per cent stocks, 40 per cent bonds. But some market strategists have suggested 70 per cent stocks, 30 per cent bonds. For twenty- and thirtysomethings, 80-20 or even 90-10 could work.

Don’t sell

Selling core holdings in anticipation of a market correction will, at best, bring temporary satisfaction. The reason is that there’s a twofold challenge to market timing. You have to get the exit point right, and then get back into the market in time to capture the gains of the inevitable rally ahead. There are investors who cashed out during the crash of March, 2020, who are still sitting on the sidelines.

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Keep buying

Put some money into your investments every time you get paid, and don’t stop until you retire. If markets keep rising, you’ll benefit from the new money you added. If markets fall, you’ll take advantage of declining prices. Win-win.

-- Rob Carrick

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Why Canadian bank stocks have further to run

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The sector has outperformed the benchmark by more than 10 per cent year-to-date, leaving it fairly valued relative to market history. Investors in the sector can expect solid returns over the next five years, according to Scott Barlow.

Why Canadian energy stocks still hold long-term appeal despite climate activism

Big energy companies are looking increasingly vulnerable to activists, who are pushing for limits on carbon emissions as the world gets serious about tackling global warming. Where does this leave investments tied to the Canadian oil sands? David Berman takes a look.

The Rundown

These moves can cut your ETF commissions from hundreds of dollars a year to zero

Big progress was made this week in fixing a stubborn drawback of investing in exchange-traded funds, particularly for young investors, says Rob Carrick.

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Earnings growth, fat margins at risk as surging inflation, wages pose threat to stock market rally

The extraordinary rise of corporate earnings fuelling the stock market’s sizzling rally will face a key test in the coming months: rising wages, writes Tim Shufelt.

Others (for subscribers)

The highest-yielding stocks on the TSX, plus risk data

Friday’s analyst upgrades and downgrades

Friday’s Insider Report: Three stocks seeing million dollar sales by company leaders

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The top tech stocks that could benefit from a Nasdaq rebound

Thursday’s analyst upgrades and downgrades

Thursday’s Insider Report: Former CEO of CN Rail invests over $800,000 in this bank stock

Love how Canada’s banks beat their earnings estimates? They’re not the only ones

Others (for everyone)

Commodities hedge funds back in vogue after years of outflows

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Canadian dollar forecasts turn stronger as U.S. infrastructure plan eyed

With AMC shares sky-high, ‘gamma squeeze’ less of a driving force

Sleepy FX markets are a sign of complacency, investors warn

European stock traders place their blockbuster bets in the dark

Global funds feel the heat over Belarus ‘blood’ bonds

Globe Advisor

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Ask Globe Investor

Question: I am trying to understand the medium to longer-term potential for additional losses in a longer maturity bond fund in a potential rising interest rate environment. I have already taken a $1-per-unit hit so far and would like to know whether more losses are in store as we (potentially) move into an increasing interest rate period over the longer term. Should I crystalize losses now to avoid more in the future?

Answer: XCB is the trading symbol for the iShares Canadian Corporate Bond Index ETF. It invests in a portfolio of corporate bonds, of which 14.9 per cent are long-term issues, with a maturity of 20-plus years. Another 12.2 per cent have maturities between 10 and 20 years.

Long-term bonds are the most vulnerable in a rising interest rate environment, so it should come as no surprise that this fund is down 3.8 per cent year-to-date. The Bank of Canada appears to be more concerned about inflation and there is a growing expectation it may raise its key rate later this year. That would imply more losses for funds like XCB.

If you want to reduce your bond fund risk, switch to a short-term fund such as the iShares Core Canadian Short Term Bond Index ETF (XSB-T). It is also down for the year, but only by 0.4 per cent.

-- Gordon Pape

What’s up in the days ahead

U.S. inflation, China trade and the ECB: World market themes for the week ahead

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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