I sort of laughed at some of the media stories on Monday based the the sharp drop off of many stock markets…reading the articles you would swear the world had just shifted on its axis a few degrees. Yet then on Tuesday the markets spiked back up and the media then sounds all positive about everything. Do you know what I did during all of this….nothing.
Yes, I didn’t sell anything and I didn’t buy anything since I had already moved around $10,000 into the markets last week. I noticed the market was down a bit and we needed to shift over some cash into ETF’s (Exchange Traded Funds) in our RRSP accounts. I bought some US stock index ETF and my wife had a bit more cash so she did the same US ETF and also picked up some Canadian index ETF. So we missed the bottom…so what? We aren’t stock market timers anyway.
I think the problem most people have with this big swings down is they feel the need to do something…when in fact when you are down the answer is usually to buy something rather than sell anything. Selling just locks in your losses while buying can provided an option to load up on some good investments on the cheap. Yet if you don’t have cash handy the right answer should be chanting to yourself: this too shall pass. Because in fact, in the stock market on a whole, just about everything does pass at some point or another.
I’m not saying this isn’t easy to do the first few times. Being active in managing my own investments does make you want to do something when these big things occur, but in fact a lot of the time the right way to approach things is doing nothing. Sit on your hands if you have to but don’t login to your trading accounts…that just gets way to tempting to do something. Instead, pick up a good book and distract yourself for a while. See if the one day drop or spike is turning into a longer term trend and then decide if you need to make any adjustments according to your plan.
Yes, your plan. You know your highly emotional at this point and perhaps you already planned for this by writing out your investment objects and plan. Pardon…objective and plan? Yes you know that one page document you know you really should have written out ages ago that outlines when you buy and sell things when were rational rather than your current emotional state. See if you put in anything for drops of less than 5%…likely you didn’t which means you previous rational self is reminding you to keep sitting on your hands. No trading for you.
In my case it would look something like this:
“Invest the money into your trading accounts approximately once a month…do not let it build up in the chequing account (you may get delusions that you are rich otherwise). Our investments are broken into three buckets: pension, RRSP and TFSA. Pension is the long term money and invested in the second most conservative option available from my plan provider. The RRSPs are in index based ETFs. The current ideal ratio is about 40% in bonds, the rest even split between Canada, US and world. Only rebalance about once or perhaps twice a year. TFSAs are the high risk investments in individual stocks. Seek out mature companies providing monthly billing services that pay dividends (ideally Canadian -remember that the US doesn’t recognize TFSA yet as a tax shelter and you will pay tax on US dividends). Target average payout from TFSA accounts is 5%. So some high risk ones are allowed if they are balanced off by lower risk ones. When you max out contribution room in all RRSP and TFSA then consider adding taxable accounts. You may only borrow to invest from the Line of Credit if you have put the money back in less than three months.”
That’s it…notice I have nothing about market drops in there. It doesn’t prevent me from shopping a downturn, I just need to have the money into the accounts to do it or be able to put there in a short period of time.
So how do you handle these downturns or upswings?