Investing

COVID-19: How it has affected the markets and your investment?

COVID-19: How it has affected the markets and your investment?

As you know, stock markets around the world have experienced unprecedented volatility, primarily because of the COVID-19 pandemic. In these crazy times, we thought it might be helpful to offer some information and insights in an effort to address the implications it has on your investments.

Over the past couple of weeks, the value of most investments has fallen considerably. There are lots of opinions out there on why this is happening but it’s not something anyone could control or predict accurately. When it comes to investing, it’s really important to make sure our decisions are logical more than emotional so rather than trying to figure out what’s driving other people’s decisions, it’s much simpler to focus on asking what makes the best sense for you. From our perspective, there are 3 general courses of action to consider:

Strategy 1 – If the kitchen is too hot, get out!

It’s not easy to watch your investments drop in value. For some people their instinct will be to run to safety but be careful before you move forward with this course of action for the following reasons:

      1. A lot of the damage is done already. If you trust the logic that successful investing is all about “BUY LOW, SELL HIGH” then selling low after a big drop of 20%, 30%, or more doesn’t make logical sense.
      2. You could miss out when the market starts to go back up. If you move all of your money into a ‘safer’ place, you will miss the opportunity to recover in a low-interest environment. In the past, we have seen lots of people miss the opportunity with no chance to participate in the recovery.
      3. Successful market timing is really difficult. We’ve always said the decision to sell at the top is extremely difficult to time. The decision to buy back in at the bottom is also extremely difficult to time. The ability to time both the sell decision and the buy decision properly is near impossible. You may instinctively want to move to safety for a period of time but the next challenge is to decide when to get back in.

Remember that you only make or lose money at the point where you sell your investments. If the market drop is causing you stress and stopping you from sleeping at night then it might make sense to cut your losses and either shift to something less aggressive or get out of the markets altogether. However, before you make the decision to sell, you might want to consider the next strategy.

Strategy 2 – Could this be the buying opportunity of a lifetime?

Although this strategy is not for the faint of heart, some will look at the downturn in the markets as an opportunity to buy. We want to be clear that we’re not trying to downplay the significance of the COVID-19 virus or minimize the experience that people are currently dealing with but, when you look back at other major downturns in the stock markets (in 2008 for example) you can see how events like these could create opportunity from an investment perspective.

For those of you who’ve been in one of our information sessions, you’ll have heard us say that times like these are when investments go on sale. If big-screen TVs go on sale 20% to 50% off, people line up for hours to get a chance at getting those deals. Maybe investments are offering those same deals today?

In hindsight, many of us would agree that buying more investments in 2008 after the world financial crisis caused markets to go down 20% to 50% would have been a great thing. Similarly, buying more investments back in 2001 after the tech bust would have paid off down the road. While our industry likes to remind us that “past performance is never an indicator of future performance”, years from now, we suspect many of us will look back and see that this recent downturn in 2020 was the best investment opportunity in our lifetime.

If you have a Group RRSP or Pension Plan through work, the good news is contributions continue to happen every month. This is known as Dollar Cost Averaging and, over time, it tends to create higher investment returns than if you were to make just one contribution per year. This is because making multiple investment purchases over the year helps you buy more when the markets are low. Right now, with every new contribution you make, you’re essentially getting a far better bang for your buck than you were in January simply because lower investment values mean you can buy more investment units with each contribution.

For me, the truth is I have been buying into the markets through ETFs all the way down as markets have been falling.

Related article: My portfolio of ETFs

Here are a few market statistics to think about:

      • Markets typically rebound within 12 months after big drops
      • Markets have gone down 20 of the past 80 years. In 18 of those 20 years, the markets rebounded with positive returns in the following calendar year
      • The average return that followed a negative year was 14.6% We know it can be tough to invest more (or more aggressively) when the markets are falling so, if you’re not so panicked that you need to sell but still nervous of investing more, there’s one more strategy to consider

Strategy 3 – Stay the course

Most of the financial industry will preach the buy and hold strategy. There are many reasons why but most people will believe that markets will eventually recover. The key word here is ‘eventually’. Often the reason that people are fearful is that we just don’t know how long the recovery will take. While it’s easy to let doom and gloom take over our decision-making process, it’s important to take a logical rather than an emotional approach to decision making. So let’s look at some additional realities of the stock market:

      • Markets go up more often than they go down. Over the past 90 years, markets have gone up 74% of the time and down 26% of the time.
      • Markets have lost more than 20% only 4.5% of the time.
      • Markets rarely experience back to back negative years. It’s only happened twice in the past 75 years The bottom line is that markets go up and down. As much as we hope markets will stay positive all the time, the risk of a correction is always there.

Every correction or bear market is a test of patience.  It’s not easy but a necessary reality of the markets.  For those of you who might need some help, this is where financial advisors can provide support. Others are questioning whether financial advisors still provide value for the higher fees they charge and as a result are considering Robo Advisors. For the do-it-yourself investor, discount broker platforms like Questrade give you the freedom to buy, sell and trade based on your personal beliefs.

Times are tough so try to keep a level head and not let your emotions get the best of you when it comes to managing your investments. Stay safe and good luck.

Comments

  1. Tyler

    Great article Jim! “Stay the course”

    • Paul

      I wonder how many people got involved with investing in the last ten years and have never experienced a drop like this. I am very happy I continued investing (carefully) in 2008-2009.

  2. Ron Leslie

    Jim, we enjoy your articles and appreciate your advice. Stay the course. Take care.

  3. Nik

    The coronavirus pandemic is a truly unknown event. Around the world, governments are taking actions that have never been taken before outside wartime. So conventional assumptions have to be revisited. We rely on advice from experts whose models and historical data cannot have incorporated similar conditions to what we are, and are about to, experience. Economic fundamentals depend on assumptions about markets and human behaviour that are increasingly strained. Everyone needs to make informed decisions, consider the upside and the downside, and remember especially now all those disclaimers about past performance. I was strongly in the Stay the Course camp until recently. I think Buying Opportunities will come, but the future of many businesses is unknown, their valuations are very high against future earnings, and largely it’s a situation of catching falling knives. So to sleep well I’m getting out of the kitchen until there is some sense of stability among governments and policy.

  4. Calvin

    Buy high sell low is a great theory only problem even after a 11 year bull market everyone wants the last dollar in the market then this happens. Selling early was the right move and wait this out. If you have not sold some by now it may be to late. Why did we not sell high is the real question. We should have had much more in cash by now and wait for some stability. To buy at bottom is impossible but we need to the the fundamentals of the stocks before we but which is a long ways off.

  5. Danny

    I am looking at your remark that “ Markets go up more often than they go down. Over the past 90 years, markets have gone up 74% of the time and down 26% of the time.”
    Looking at such a long time frame is very misleading, although it is popular with so many investment advisors. Lets look at a more realistic time frame of 20 years. The TSX is now at the same level that it was in 2000. Therefore anyone that bought and held into it for 20 years did not make any money. Furthermore, if you draw a line at the current TSX level stretching back to 2000, you will see that the TSX was above that line about 50% of the time. Therefore, 10 out of the past 20 years were a bad timing for buying the TSX. That makes the chances of making any money on the TSX equal to flipping a coin, and who would do that for his life savings?

    • Mia

      Well done Danny. Exactly!

    • Ken Klassen

      The statements that “The TSX is now at the same level that it was in 2000” and that “anyone who bought and held into it for 20 years did not make any money” are both incorrect. When comparing stock market indices it is important to look at the ‘adjusted close’ which accounts for both dividends and splits. Today’s (March 20, 2020) S&P/TSX Composite Index, which closed at 11,851.81, is higher than the adjusted close of 9,568 30 from March 20, 2000.

      • Danny

        Ken, your numbers show a compounded yearly gain of 1.07%, which is lower than inflation . A GIC or even a Tangerine saving account could do better and without the stress

    • DivInvestor

      Danny, I don’t know where you get those numbers from. I have my own record from 2000 to 2019 which has an average annual return of 11%. (that includes dividends) Even with this great drop, as of yesterday my portfolio is still 6 times higher than in 2000. I invest for the dividends and hopefully most companies will continue to pay them through this calamity. It’s too early to give up on the market.

  6. Elaine Kurtz-Hardowa

    Definitely tough times I hope the markets return to positive territory!

  7. Steve

    Sage advice in tumultuous times. Thank you, Jim.

  8. Bob

    U gotta have patience. Get your avg dollar cost on your existing stocks or ETFs lower. As price drop in dollar increments buy more of what u already have. Not too much at any one time , take advantage what it might be in 2 days!.,Realize if u had highly speculative choices at the beginning then buying more might be crazy. Make it work for yourself.

  9. Carol

    As a widow in my 70s I hate the thought that when I die more than half of the value of my RRIF will go to the government in tax. I’m using this extreme volatility to sell shares in my RRIF and rebuy in my cash account. I buy in my cash account when one of the blue chip dividend stocks drops 10% and put a sell order in my RRIF for the same stock at plus 10%. I’m doing approx $4500 transactions at a time to keep the withholding tax to 10%. There will more tax to pay at year end but nowhere near the 50% plus my estate would pay. So far I’m well ahead of the game but who knows…

  10. David

    Hello. I am a passive investor, with a portfolio target of 15% Canadian index, 15% International index, 30% U.S. index and 40% Bond index. At the moment because of the market drop my portfolio has been skewed to 11% Canadian, 13 % International, 27% U.S. and 49% bonds. I tend to readjust my portfolio every four months should the target breakdown vary over 2%. My questions are 1) Is this too often to re-balance? and 2) Is this a good time to re-balance my portfolio?

  11. Hanna

    My husband and I have been using this opportunity to use HELOC at 5-year rate of 2.5% to buy Canadian bank stocks with 6-8% yields. I am still working at a secure job I enjoy so we can pay off this loan within 5 years. Meanwhile, reinvesting all the dividends allows us to accumulate even more shares no matter what happens to stock prices. Since my husband is retired these dividends will be tax-free in margin account under his name For us this is stress-free investing and opportunities like these rarely come by.

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