David Aston Contributor
March 14, 2020
Stay calm and follow these steps to keep your finances secure
You are no doubt a bit punchy after being bombarded by all the bad news out there the last few days. That's only natural because the coronavirus crisis obviously is a threat not only to our health but also to our economic and financial well-being.
With stocks in steep decline and a possible recession threatening, Canadians appear to be facing the most challenging economic and investment situation in more than a decade.
So what do you do now in response to that challenge?
The most important thing to realize is that Canadians have successfully weathered a number of severe recessions and terrible stock market declines periodically in the modern post-Second World War era.
Of course, we haven't experienced a recession or stock market meltdown for a while, but the last one in 2008-09 was a nightmare: It devastated portfolios, forced many to put off their retirement and many investors didn't recover for years.
At the onset of these kind of economic and financial crises, no one can reliably predict how long they will last or how severe they will get. Pretty much the only thing we can say with confidence is that at some unknown point in time, the economy - and stocks with it - are going to recover and then grow past the point where they are today. Of course it could take months or it could take years, so it pays to be cautious
Here are three tips to keep in mind:
- It's a good time to assess your whole financial situation.
To start with, it makes sense to look beyond what's happened to your battered investment portfolio and assess the state of your of over-all finances. That includes thinking a little about whether you have a secure job in a stable industry or not so much. That over-all assessment can help set your priorities on what you do next.
As an example, what if you're starting to have a smidgen of doubt about your long-term job security? At this stage in most cases, you're probably under no concrete threat to your livelihood, but it makes sense to be a bit cautious nonetheless. So if your job isn't fully secure, now may be a good time to build up an emergency fund if you don't have one, just in case. Experts say it is a good idea to have at least three to six months worth of spending that you can tap for any kind of sudden need.
What if you're a retiree whose finances are fairly tight and you've been significantly impacted by the steep stock market decline? Retirement plans are customarily built to withstand quite a bit of adversity, so there's a good chance you're still in pretty good shape. But just the same, with so much uncertainty, it pays to be a bit cautious. If your finances are tight, it may be prudent to cut back on discretionary spending a little. (If you are one of those retirees whose budget includes cruises or travel, you may have already been forced to cut discretionary spending.)
Of course, there will be a group of people with stable well-paying jobs, a strong over-all financial situation, with lots of money in the bank. For those people, the economic and financial crisis might create opportunities. Interest rates have already come down, so it will help anyone looking to get a mortgage and buy a home. Although it is not clear what is going to happen to home prices, they might take a dip as well. Still, even if you're in a strong financial position, it makes sense to be a bit cautious.
- Stay the course on your investments.
If you have money in stocks right now, you're no doubt feeling plenty of angst at the stock market carnage. Feeling that pit in your stomach is totally normal, for unsophisticated investors and savvy investors alike.
"That feeling of fear and anxiety is very normal for everybody, professionals included," says Dan Hallett, vice-president research at HighView Financial Group, an investment counsel firm. "The important thing is how you act as a result."
What the savvy investors realize is that one of the keys to long-term success in the stock market is that you stay invested through difficult moments like now and don't sell your stocks in a panic. Stocks might go down much further or they might not. Nobody can realistically predict where the bottom will be or when it will happen. The bear market in stocks might continue for weeks, or months or possibly even a few years. The one thing that the savvy investors know from every bear market that's happened in the past is that stocks eventually recover and go on to set new highs.
So they ride out all the ups and downs in order to take full advantage of the recovery when it eventually happens.
Some investors are tempted to think that they can sell their stocks now then buy them back later when they think stocks may have stabilized at a lower price. But while that sounds somewhat plausible in theory, it is extremely difficult to do in practice. Unfortunately, there is no way to reliably time the markets, even for the savviest investors. So while you might avoid some further stock declines, there is a good chance you'll miss out on even more of the recovery when it eventually happens.
Furthermore, people who bail on stocks face a big behavioural challenge in getting back into the market. "They set themselves up for the hardest decision in investing," says Tom Bradley, president of Steadyhand Investment Funds Inc., an investment management firm. Many people who bailed on stocks during the 2008-2009 stock meltdown could not stomach buying back after stocks started to recover in 2009 because no one could know for certain that the worst was over and there wouldn't
be another big setback. "They didn't want to get back in to the stock market and have a big decline happen again," says Bradley.
- At some point, think about rebalancing.
A proven long-term strategy for savvy investors is that at some point they go beyond simply holding onto their stocks without selling but actually start to buy more stocks to take advantage of the beaten-down prices. The way it ideally happens is that you have a long-term asset allocation split between stocks and investment-grade bonds (or GICs) which you've set according to your risk tolerance and other factors. (Asset allocations vary widely, but for simplicity let's assume a 50/50 split between stocks and bonds, which is a bit on the conservative side.)
Typically what happens in a big stock market meltdown is that the stock component of your portfolio gets beaten down, whereas investment-grade bonds more or less maintain their value or may even go up in price a bit, which is essentially what happened in this stock market meltdown.
At some point, savvy investors start selling the assets that have done well (investment grade bonds) to buy beaten-up stocks which can now be purchased at relatively attractive prices. Eventually, they get their asset allocation back to their long-term target, which in this case is 50/50 stocks and bonds. This offers the twin benefits of buying back in to the stock market at relatively low prices and then taking full advantage of the eventual recovery in stocks when it happens.
Of course, there is no one right way to rebalance. Different investors follow different rebalancing processes. Some smart investors have yet to start rebalancing in the current environment. Others, like Steadyhand, began "meaningful buying" after the big market jolt on Thursday, says Bradley. Some investors prefer to rebalance in big jumps, but here's Bradley's advice: "Rebalancing is a hard thing for people to do so I think they should do it in stages." The bottom line is you should try to do some of it at some point to turn the stock market decline to your advantage as much as possible, but there is never a perfect way or perfect moment to do it. "It's not something you should try to get precisely right in terms of timing," says Hallett.
"You just can't do that."
David Aston, CFA, is a freelance personal finance and investment journalist. He has an M.A. in economics and is a chartered prodessional accountant.
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