All the anxiety you feel these days about what the trade war is doing to your stocks, ETFs and mutual funds?
That’s investing, folks. Sometimes, it blows.
There was always going to be a big decline in the stock markets after the amazing returns of the past five years. It looks like tariffs could be the tipping point for Canadian stocks, at least.
In a Season 7 episode of The Globe and Mail’s Stress Test personal finance podcast, I asked chartered financial analyst Darryl Brown if investing in the stock market means we basically have to get punched in the face by our investments every few years. Mr. Brown’s reply: “Pretty much.”
Prepare to be punched. If we can’t dispense with tariffs in a hurry, expect to see a lower dollar, lower stocks and a recession.
If the flow of reader e-mails is an indication, people are desperate to avoid the drama ahead. One person said her portfolio fell $6,000 in one day and wondered if she should sell to lock in her gains. Another wondered if gold is the safest thing, while someone else described himself as a retiree living in fear of tariffs and losing it all in the market.
Some questions are darker still. Examples: How would investors be financially affected if Canada is annexed by the U.S., and what happens if electronic warfare is used on this country’s financial networks?
We are a long way from having to delve into these extreme outcomes just yet, so let’s set them aside and work on the more immediate problem of your investments losing value.
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First, check your timelines. If you need your money within the next five years, get it out of the stock market immediately and put it in a bank savings account or similar products offered to investors. Only by committing for at least five years, and much preferably 10, can you be confident that stock market ups and downs will net out in decent returns.
Second, we have to address the mental accounting that accentuates investment losses beyond what they really are. Don’t measure returns from the high-water mark for your portfolio, which might have been earlier this year. Instead, look at your annualized total returns for the past three-, five- and 10-year periods, and returns since inception. Expect to be pleasantly surprised.
The latest guidelines set out for financial planners say the estimated long-term rate of return is 3.4 per cent for bonds, 6.4 per cent for Canadian stocks, 6.5 per cent for foreign developed stocks and 8.3 per cent for emerging markets.
The actual numbers lately have jumped way ahead of these projections. The S&P/TSX Composite Index, the benchmark for Canadian stocks, produced an annualized total return of 12.7 per cent for the five years to Feb. 28. The S&P 500, the key U.S. benchmark, has delivered a five-year annualized total return of close to 18 per cent in Canadian dollars.
When stocks crash, we eventually get a surge that brings returns back up to normal levels. It’s the same when stocks get ahead of themselves – we get a downturn to get back to historical norms.
One of the perversely fascinating aspects of investing in stocks is figuring out what will cause the next pullback. Overvalued tech stocks did the job in 2000-01, the global financial crisis crushed stocks in 2008-09, and the pandemic briefly hammered the market in 2020.
Our trade dispute with the U.S. may well trigger the next correction. If not, then prepare for something else. Some basic strategies to prepare for any market decline:
- Hold some bonds and/or guaranteed investment certificates: Bonds had back-to-back money-losing years in 2021 and 2022, but they’ve done well since then and stand ready as portfolio bubble wrap. Guaranteed investment certificates are fine as a bond alternative, although bonds offer more upside right now.
- Have some cash: Cash holdings give retirees a fallback if they need to withdraw money and don’t want to sell hard-hit stocks or funds. Also, patient investors can profit in the long-term by putting cash into a beaten down market.
- Cut the gimmickry: Fast-falling markets will crush a lot of the theme, meme and sector investments that seemed so shrewd when stocks were flying. You have a chance now to get out before real damage is done to your portfolio.
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.
