A general view shows the trading floor of the New York Stock Exchange, Aug. 7.Yuki Iwamura/The Associated Press
For Canadian investors, rising stock markets feel good. But as the stock market continues its upward trajectory, more and more of my clients are feeling anxious, wondering when the big correction will come.
It’s like the slow tick-tick-tick of the roller coaster as it climbs the steep hill. Where’s the top? When will we plummet over the crest? This is the irony of a long bull market: it can make us feel anxious.
If you are experiencing anxious anticipation – and not the giddy roller coaster kind – take heart, there are things you can do to calm your nerves.
Reframe a decline as giving up some gains, not losing money
Recent market returns have been outsized relative to history, and giving back some of these gains would bring us back to more normal returns. Even if the market goes down by 20 per cent – the definition of a bear market – returns would still be above the long-term average.
Here’s how to reframe a market correction. The S&P 500 index’s price has risen 63 per cent over the past three years, and the Canadian market is up by 71 per cent.
If returns over the past three years had been in-line with historic returns, your U.S. investments would have grown by about 28 per cent instead of 63 per cent (excluding dividends, in U.S. dollars), and your Canadian money would have risen by about 22 per cent instead of 71 per cent (excluding dividends, in Canadian dollars).
Even if we have a 20-per-cent decline starting today, your three-year returns would still be higher than the 30-year returns.
In summary, a bear market would simply bring gains back to more normal levels.
Set your expectations to be prepared emotionally
It’s one thing to see a percentage decline in value your portfolio. It’s a whole other thing to see how many dollars you have lost.
Prepare yourself by calculating the dollar amount of how much your accounts values would go down when markets turn. By knowing ahead of time what that number will be, you should be better able to fend off panic.
If you have $300,000 in your RRSP, a 20-per-cent market decline will bring that down to $240,000, a loss of $60,000. If this figure is going to cause you problems, then your risk tolerance might not be as high as you think it is. You need to reposition your portfolio now to make it more conservative.
Having some fixed income and cash will help to moderate the volatility. But remember: asset allocation is about what’s right for your time horizon and ability to emotionally withstand volatility. Stick with the right allocation for your profile no matter what the market is doing.
Prepare your portfolio appropriately
Investing in stocks, for those of us building wealth, is all about having a long time horizon. You need to be able to stay invested for at least seven years.
A market sell-off can be devastating for people who are depending on that money for something specific: a down payment, their kids’ university tuition or a new car to replace the one that just bit the dust. Ask yourself whether you are exposed to this risk – if you are, you have the wrong investments.
Any money you’ll need in the next three years should be in a cash-like investment. Money you need in the medium term – four to six years – can be in a mix of stocks and bonds.
Registered Education Savings Plans need some cash if the beneficiary is heading to postsecondary school in the next two to three years. Retirees who plan to withdraw from a RRIF or RRSP in the near term should hold two to three years of withdrawals in something safe. Money market mutual funds and high-interest savings ETFs fit the bill for cash, and bond ETFs or GICs are great for the fixed income allocation.
Enjoy the gains in your portfolio and rest easy – when the market correction comes, you’ll be prepared.
Anita Bruinsma is a Toronto-based certified financial planner at Clarity Personal Finance.
