Murphy’s law adapted to investing in 2022: Anything that can go down in price will go down.
Stocks and bonds have been bludgeoned so far this year, both gold and bitcoin are downers lately and the star sectors of last year are getting toasted. Earlier this week, each of the 12 daily financial indicators listed at the top of the Globe and Mail website was in the red, but one.
The exception was the Chicago Board Options Exchange’s Volatility Index, or VIX, which measures the amount of expected stock market volatility in the next 30 days. A higher VIX is yet another negative – it means investors fear more turbulence ahead.
What to do to protect yourself: consider following these five modest steps, and then buckle up. Avoid tackling the temporary freak conditions of 2022 by dismantling a portfolio well-built by traditional standards.
Step One: Get your house down-payment fund out of stocks and bonds. Save those assets for pursuing goals that stretch at least five to 10 years in the future and instead keep your down payment money in a high-rate savings account.
Step Two: If you’re heading into retirement or already there, ensure you have enough safe, liquid money to fund two or three years’ worth of income. Do not expose yourself to the risk of having to sell hard-hit stocks or equity funds to meet your annual mandatory withdrawal from a registered retirement income fund.
Step Three: Consider using guaranteed investment certificates to augment bonds in the non-stock part of your portfolio. GICs don’t fall in value and offer yields of up to 3 to 4 per cent. GICs are illiquid, so don’t use them for money you can’t lock in. As for bonds, they’ll rise again after interest rates peak.
Step Four: Accept that the time for theme, dream and meme investing is done for now. Pivot to quality from speculative potential.
Step Five: Make a list of stocks you want to buy on the downswing and feed money in when the markets have a particularly bad day. Dividend investors, watch how yields rise as share prices fall.
The epitome of 2022 weirdness is the failure of the traditional balanced portfolio, with a 60 per cent weighting in stocks and 40 per cent in bonds. Holding bonds is traditionally how you take the edge off stock market declines. But stocks are down in 2022, and so are bonds.
For the year through May 10, the S&P/TSX Composite Index was down 5.4 per cent, the S&P 500 was down 16 per cent and the FTSE Canada Universe Bond Index was off 11 per cent. Bonds are supposed to go up when stocks plunge, or at least hold their ground. What’s gone wrong?
Blame inflation, which was brought back from a state of near-irrelevance by the pandemic. Crimped supply chains met voracious demand from people unable to spend during lockdowns and produced inflation like we haven’t seen in 30 years.
Inflation will be conquered, but it’s a messy process. Interest rates have to rise – that’s why bonds are floundering just now. As rates rise, the economy cools. Concern about a recession is why stocks have lost the zip that propelled them to huge gains after the COVID-19 crash in March, 2020.
It’s tempting in these uncertain times to think there’s a particular investment or asset that will shield your portfolio from losses. Good luck with that. Gold, supposedly a rock of stability, has fallen from its March peak to not much higher than it was a year ago. Bitcoin has lost about one-third of its value since the beginning of the year, with most of the damage happening in the past six weeks.
The asset that has delivered more than any other in the past 15 or so years is real estate. But even here, there’s no respite from the bad news of 2022. Rising interest rates are making it more expensive to finance the purchase of a home, and this in turn has weighed on sales and prices.
In their way, the first two years of the pandemic were just as disruptive to the financial world as 2022. The difference is that this earlier volatility caused stocks, houses and other assets to soar in value. Now, it looks like some of that pandemic wealth will be clawed back from the people fortunate enough to have participated. Remember, a lot of Canadians were financially slammed in the pandemic because they lost income and jobs.
Whatever happens with investments in the months ahead, stay focused on 2023 and beyond. Today’s dramatics are a pandemic-driven anomaly, not a rewriting of the rules of investing.
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