Are you a nervous investor? You aren’t alone.
If you are a nervous investor right now, I get it. The economy has hit a bumpy patch. The potential is there for slower growth, higher inflation, maybe a recession, and clearly, we are in an environment where interest rates are rising. Investors fear these risks could lead to lower corporate profits and volatility in the market.
The reality is if consumers have less money to spend, corporate earnings will be compromised, and stock valuations slammed.
However, here is a small concession, these risks have been talked about for a while and are likely already reflected in many companies’ stock prices. In the U.S., the S&P 500 has been flirting with bear market territory for most of the year. A bear market is a 20% drop or more from a previous high. While the S&P/TSX has been in correction mode, a drop of approximately 10% or more from a recent high. Why the discrepancy? Canada’s main index has held up better than many other markets largely due to its weighting in the energy sector. Energy prices have moved higher over fear supply won’t be able to keep up with demand as the global economies re-open post-pandemic.
The good news, markets have shown early signs of stabilizing after bouncing back from their current lows. This may leave some to wonder if the market corrections are behind us. Maybe! The challenge we face is we just can’t be sure.
Unfortunately, the market doesn’t wave a “white flag” to indicate the worst is over. However, what we do know is that stocks prices tend to move, not only when there is good news, but even before that, when the news is better than investor expectations.
So, what does this mean for you? Proceed with caution and know your numbers.
Here are my top 5 money strategies during periods of volatility.
1) Don’t try to time the market
Stick with good quality companies that are leaders in their industry, have cash on hand with little debt, and ideally pay a dividend. Take the time to know what you own, be realistic about your return expectations and your risk tolerance. When it comes to risk, ask yourself, how much am I willing to lose, and how much can I afford to lose?
2) Don’t sit in cash
Capitulation is a term often used to describe an investor who simply can’t take the market turmoil any longer, sells all their holdings, moves to the sidelines and sits in cash. By letting your emotions dictate your investment decisions, you run the risk of buying high and selling low and you ultimately lose money. Parking your money in cash over the long term will earn you next to nothing after taxes and inflation and make it very difficult to keep up your purchasing power over time. You should have some exposure to the stock market.
3) Don’t fall prey to market fear
If you have at least a five-year time horizon, consider investing small amounts into the market on a regular basis. The strategy is commonly referred to as “dollar cost averaging”. This strategy will help you to become a long-term investor versus a short-term speculator. Pre-authorized purchases over time, on specific dates takes the guesswork out of investing.
4) Never abdicate full financial responsibility to someone else
This doesn’t mean you shouldn’t work with an advisor. In many cases I think you should. However, no one will care more about your financial future than you. Be involved, ask the tough questions, revise your plan, and then respect yourself enough to stick with your plan.
5) Don’t fall in love with your assets
In other words, don’t fall in love with your investments. Sometimes you get it wrong and need to sell underperforming stocks. Why? There is an opportunity cost to (finding a much better investment) holding onto a loser too long. You don’t always get it right and that’s okay. Sell and move on.
There is no question that 2022 has been tough for investors. Now is a great time to compile your net worth statement and confront your financial facts. Unless you can clearly see how much you own and what you currently owe, it will be very difficult to make the necessary changes in your household that could lead to financial freedom or even some financial wiggle room.
Bottom line, look for ways to free up some money to deal with higher costs and consider investing. For some that may mean taking some of the equity out of their home via a reverse mortgage.
Diversification has been proven to work. It just makes sense to have some money in cash, fixed income, stocks as well as real estate to keep up your purchasing power.
