You’re right to be nervous about your investments after the huge, widespread gains since the market crash of March, 2020.
Phenomenal returns have been generated by assets as varied as preferred shares on the conservative side and cryptocurrencies on the risky end of things. All of this while we’ve been fighting, with both successes and failures, against a global pandemic. Further gains are possible if there are positive surprises in how economies in Canada and around the world emerge from pandemic lockdowns.
But risks are also starting to emerge, notably an increase in inflation that causes central banks to crank up interest rates at a faster rate than previously thought, and to higher levels than anticipated. Given the uneven progress in defeating the pandemic, there’s also a risk of a COVID-19 flare-up that sets us back.
These uncertainties were on the mind of a reader who recently posed this question: “With all the talk of the potential bursting of the bubble re the stock market, how should your average investor deal with it?” Here are four suggestions:
Trim your speculative holdings, and be ruthless
Market conditions of the past year have rewarded investments made on hype, hope and momentum. If you benefited, then think about locking down some profits by selling some or all of your speculative holdings. Ask yourself this about any of the high flyers in your portfolio: If the markets fell 20 to 30 per cent, how might this stock or fund perform? How did it do in March, 2020, when the bottom fell out?
Own bonds or GICs
The FTSE Canada Universe Bond Index was down about 4.5 per cent for the first five months of 2021, which is disappointing for a supposedly safe asset. Bond prices have fallen because interest rates in the bond market have moved higher. But if stocks plunge, money will flow into bonds as a safe haven. This, more than anything, is the reason to hold bonds or guaranteed investment certificates. How much exposure to bonds? The default portfolio breakdown has long been 60 per cent stocks, 40 per cent bonds. But some market strategists have suggested 70 per cent stocks, 30 per cent bonds. For twenty- and thirtysomethings, 80-20 or even 90-10 could work.
Don’t sell
Selling core holdings in anticipation of a market correction will, at best, bring temporary satisfaction. The reason is that there’s a twofold challenge to market timing. You have to get the exit point right, and then get back into the market in time to capture the gains of the inevitable rally ahead. There are investors who cashed out during the crash of March, 2020, who are still sitting on the sidelines.
Keep buying
Put some money into your investments every time you get paid, and don’t stop until you retire. If markets keep rising, you’ll benefit from the new money you added. If markets fall, you’ll take advantage of declining prices. Win-win.
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