We learned Monday that the stock market isn’t an elevator headed to the basement level.
The worst week for stocks since the 2008 financial crisis was followed by a resounding bounce higher. Enjoy the respite from last week’s misery, but plan for more of it ahead as the financial world analyzes how the coronavirus will affect the global economy and the stock market. Here are some personal finance and investing do’s and don’ts to get you through the months ahead.
Do expect interest rates to fall
It could happen as soon as Wednesday in Canada and later this month in the United States. Central banks will lower their trend-setting interest rates, and that in turn will lower borrowing costs for individuals and businesses.
Variable-rate mortgages, lines of credit and floating rate loans would be affected right away. Returns on savings accounts could follow.
Rates in the bond market have already plunged and we could see a resulting downward move in fixed five-year mortgage rates. The yield on the five-year Government of Canada bond, which sets the trend for five-year fixed mortgage rates, briefly cracked through the 1-per-cent market Monday afternoon. That’s down from 1.76 per cent a year ago, a tremendous drop by bond market standards.
Don’t interpret lower rates as a good thing
Yes, borrowing costs will fall. But consider the reason – concern about a recession. Jobs, pay raises and bonuses could be at risk.
Don’t delay if you want to put money in GICs
As go bond yields, so go the returns on guaranteed investment certificates. The longer you wait to buy GICs, the biggest the risk that today’s already low yields will get smaller.
Notice the cruel investing math at work here? As safe havens get more attractive in comparison to stocks, the returns they offer get worse.
Do start an automatic investing plan for contributions to registered retirement savings plans or tax-free savings accounts
Fallen markets offer a perfect time to start making contributions to your investments every payday. Start putting your money into the markets while prices are low.
Make the plan automatic so that money is electronically transferred from the chequing account where your paycheque gets deposited into your TFSA or RRSP. Automatic investing also eliminates the chance you’ll skip a contribution because stocks are down. That’s precisely when you want to buy.
Don’t waste time trying to figure out which sectors will profit and which will offer safety
Should you search for the biotech company most likely to develop a coronavirus vaccine? Buy 3M stock because the company is a big producer of respirator masks? Maybe gold because it’s a legendary hedge against uncertainty?
Forget about the quick score and instead use the recent market decline to buy foundational investments that you could foresee owning forever. Dividend stocks have been talked about and praised to the point of tedium, but they certainly qualify. So do exchange-traded funds tracking the big stock market benchmarks, and quality equity mutual funds.
Do consider a summer vacation in Canada this year
Save money on foreign exchange costs and reduce the stress of wondering whether the expensive foreign trip you booked might be affected by the virus.
Don’t get caught up in disaster planning
Selling your investments or stockpiling food and household goods are overly extreme reactions to what’s happening in the world. Selling your investments could set you back years in meeting financial goals such as retirement. Stockpiling could mean blowing your household budget to buy a bunch of things you don’t actually need (bottled water) and may never use.
Do use your tax refund for debt reduction or adding to savings
Two guaranteed ways to improve your ability to handle financial shocks are to reduce debt and build up your emergency fund. Where might you find the money? Just file your income tax return for 2019. The Canada Revenue Agency reports that the average tax refund over the past 12 months was $1,740. That’s a nice start on an emergency fund right there.
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