A man wearing a protective face mask walks past a stock quotation board outside a brokerage in Tokyo, on Nov. 2, 2020.ISSEI KATO/Reuters
The times, they are a’changin'. The basic rules of investing, not so much.
Whatever happens in the U.S. election on Tuesday, there’s going to be a lot of analysis about the impact on stocks and bonds. Stocks may bounce around if there’s uncertainty about a winner or future policies regarding things such as taxes and trade.
But there are some investing truths that transcend political events and have a much bigger effect on your investing success than elections, even one as important as this. Here’s a selection of six of these truths:
We live in a low-return world
It’s not just the pandemic that explains low interest rates. We have an aging population in many industrialized countries that keeps inflation in check. This explains why interest rates never snapped back to previous levels after the 2008-09 recession.
Stocks have rallied back from the March crash, but upside potential from here is limited by our ability to defeat COVID-19 and get the economy working without restrictions.
If you built a portfolio by splitting your holdings between stocks (Canadian, U.S. and international) and bonds plus a little cash, you could reasonably expect long-term average annual returns of 3.26 per cent after fees. That’s a projection from a 2020 guide for financial planners, not people selling investments or advice. It’s cold, hard investing reality based on much more than who wins on Tuesday.
The time horizon for investing in stocks is ideally 10 years or more
The pandemic has created a base layer of anxiety in the minds of many investors and postelection market instability may add to that. Please do not make the mistake of judging your investing results or your capability as an investor by what happens in this most unusual of years.
Proper gauging of a portfolio is done over a period of 10 years. Use a five-year slice if you haven’t been at it that long, or even three years.
If a market dip in the months ahead will stress you to uncomfortable extremes, it’s time to make a call. Either you adopt the long-term approach to assessing your investments, or you back off on your stock market exposure to some extent.
The best thing you can do for your investments in your working years is add money on a regular basis
You can do well as an investor by adding money to your portfolio every time stocks fall hard. But while a lot of people did this with great success in 2020, it’s not a viable strategy for most people over their lives as investors. It’s hard to pull the trigger on a big purchase of investments when stocks are crashing, just as it can be a challenge to resist the temptation to sell.
Take the randomness out of your investing by committing to a regular contribution plan, possibly on the same biweekly schedule as you get paid. If there’s financial market turbulence in the months ahead, you’ll have multiple opportunities for your biweekly purchases to come at moments of depressed prices.
Cash reserves covering at least two or three years are the foundation of a retiree’s investment plan
Imagine this: You’re a senior who has scheduled the annual mandatory withdrawal from your registered retirement income fund for mid-December, just as a spasm of postelection uncertainty hits the stock market. Prices are way down and you’re sick at the idea of selling stocks or equity funds at depressed prices.
Avoid this outcome with some insurance in the form of an RRIF cash holding big enough to cover at least a few years of RRIF withdrawals. Let your stocks and equity funds recover in peace.
The stock market’s recovery from the pandemic is a testament to its resiliency
Lots of people are baffled by the stock market rebound after the dark days of March. Partly, it’s a lesson in how low interest rates can make stocks look comparatively good by limiting returns from bonds and term deposits. Partly, it’s a lesson in how government support for business and individuals has kept the economy more or less intact in the pandemic, and it’s also partly a reflection of how one strong sector (tech in this case) can support the major stock indexes.
The bigger takeaway from this year’s stock market rally: The stock market comes back. Not always as quickly as this year, but eventually.
Help is always available if you can’t make sense of the markets
Between human advisers, robo-advisers and investing apps such as Toronto-Dominion Bank’s new GoalAssist, there have never been more ways to get help building and managing a portfolio. Investing paralysis is a hazard in years like 2020. Get help if you need it.
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Rob Carrick